Landmark Study Reveals SOX Compliance Issues
“IMA’s study is the first comprehensive study of its kind that goes beyond estimating the cost of compliance. This study helps to identify the real drivers of cost and provides actionable insights for policy makers, regulators and professionals associations,” Paul Sharman, president and chief executive officer (CEO) of the IMA, said in a prepared statement announcing the results. “We have hypothesized for some time that current controls frameworks are inadequate, as they do not allow management practitioners to conduct cost-effective, risk-based assessments covering internal controls over financial reporting, fraud risk, general IT controls, and other areas.”
The study, conducted by professor Parveen P. Gupta of Lehigh University, assessed the views of nearly 400 experienced chief financial officers (CFOs), controllers, internal auditors, and SOX compliance specialists at publicly traded companies. The two key factors identified were a lack of practical management implementation guidance and the incomplete nature of the Committee of Sponsoring Organizations (COSO) 1992 framework in assessing the effectiveness of internal controls over financial reporting (ICoFR). Other key findings include:
- Approximately two-thirds of those responding attributed the two key factors as major cost drivers.
- More than half of respondents acknowledged that they did not use COSO 1992 to assess IT control effectiveness, in spite of indicating their control assessment was done in accordance with COSO 1992. Almost 52 percent of respondents used COBIT for the critical aspect of their ICoFR assessment.
- More smaller companies, 45 percent compared to 35 percent of larger companies, are using a “bottom-up” approach to internal controls rather than a “risk-based” point-of-view, suggesting a skills gap in applying robust risk assessment methods.
- Only 38 percent of respondents did not believe that the COSO 1992 controls framework was guiding their internal control assessments, while 62 percent primarily rely on Accounting Standard 2 (AS2), which has become the de facto assessment standard for company management.
- Fifty-seven percent of respondents did not believe that the COSO 1992 framework alone was sufficient guidance for determining the effectiveness of internal controls, strongly suggesting that practical assessment methodologies linked to the framework are necessary to assert to the Securities and Exchange Commission (SEC) that an organization has an effective system of internal controls.
“These results suggest that our hypotheses have been proven to a reasonable degree. Now it is time to develop the long awaited assessment guidance so desperately needed by American businesses to cost-effectively comply with SOX while protecting shareholder interests,” Sharman added.
The study was designed to determine the extent to which companies are using COSO’s 1992 internal controls framework and identify the factors which inhibit a successful and cost-effective SOX compliance outcome, including high-cost compliance activities, definition and use of “risk based” models, application of risk assessments (fraud, plausible, and inherent risk), integrated audits, IT controls assessments, skills gap issues and other practical areas. The study, COSO 1992 Control Framework and Management Reporting on Internal control: Survey and Analysis of Implementation Practices, includes an Executive Summary that is available free of charge. The full study is available for purchase from IMA at www.imanet.org .