In brief: COSO releases "Internal Control over External Financial Reporting: Compendium of Approaches and Examples" for public comment (No. 2012-43)

DOWNLOAD

On September 18, 2012, the Committee of Sponsoring Organizations of the Treadway Commission (COSO) released the Internal Control over External Financial Reporting: Compendium of Approaches and Examples (the Compendium) for public comment through November 20, 2012. In conjunction with the release of the Compendium, COSO has made available two other documents. This In brief article provides an overview of the Compendium.

What's new?

On September 18, 2012, the Committee of Sponsoring Organizations of the Treadway Commission (COSO) released the Internal Control over External Financial Reporting: Compendium of Approaches and Examples (the Compendium) for public comment through November 20, 2012. In conjunction with the release of the Compendium, COSO has made available two other documents: (1) the revised version of the previously exposed Internal Control — Integrated Framework (the Updated Framework) which incorporates revisions arising from consideration of comments received from more than 200 organizations and professionals, and (2) the proposed Illustrative Tools: Assessing Effectiveness of a System of Internal Control (the Illustrative Tools).

What is the compendium? 

The Compendium is part of COSO’s project to update its Internal Control–Integrated Framework, which was issued in 1992 (the Original Framework). COSO engaged PwC to author the Updated Framework and prepare the Compendium. The Compendium illustrates how the principles set forth in the proposed Updated Framework can be applied in designing, implementing and conducting internal control over external financial reporting. COSO believes it is particularly relevant to those who publicly report on the effectiveness of their system of internal control over financial reporting based upon requirements set forth in the Updated Framework. While the approaches set forth in the Compendium and the Illustrative Tools are likely to be relevant to many entities, COSO recognizes different approaches may be applied depending on the entity's circumstances.

What is the purpose of the compendium?

The Compendium has been developed to assist users when applying the Updated Framework to external financial reporting objectives and is intended to assist users in understanding how the Updated Framework can be applied. The Compendium provides additional reference material relating to the following concepts discussed within the Updated Framework:

• Types of external financial reports – financial statements for external purposes and other external financial reporting derived from an entity’s financial and accounting books and records
• Suitable objectives – financial reporting rules and standards form the basis upon which management specifies suitable objectives for the entity and subunits
• Judgment – proper application of suitable objectives to the entity’s transactions mitigates risk of material misstatement
• Overlapping objectives – operations, compliance and non-financial reporting objectives may overlap or support the external financial reporting objective
• Deficiencies in internal control – material weakness and significant deficiency reflect definitions established by regulators for internal control over financial reporting
• Smaller entities – principles are suitable and presumed relevant for all entities, and smaller entities may apply these principles using different approaches

The Compendium also reflects many changes in the business, operating, and regulatory environments during the past several decades.

Who's affected?

All companies (public and private) as well as not-for-profit and governmental entities that use the Original Framework as the basis for designing and implementing their system of internal control will be affected by this update.

What's the proposed effective date?

COSO currently plans to release final documents in the first quarter 2013. COSO has not specified an effective date or a transition period for adopting the Updated Framework. COSO expects that the Updated Framework will eventually supersede the Original Framework. Also, the Compendium will eventually supersede the Internal Control over Financial Reporting — Guidance for Smaller Public Companies issued in 2006. COSO plans to continue discussions with regulators and other stakeholders with respect to the transition period for the Updated Framework.

What's next?

The 60-day public comment period ends on November 20, 2012. COSO encourages comments on the Compendium as well as the Updated Framework and Illustrative Tools.

The entire public exposure package, presentation materials, and COSO's responses to frequently asked questions are available on the COSO website at www.coso.org. We plan to issue a Dataline containing additional analysis and insight before the end of the 60-day comment period.

Questions?

PwC clients who have questions about this In brief should contact their engagement partner. Engagement teams that have questions should contact Stephen Soske in the Boston office (1-617-530-5731), Cara Beston in the San Jose office (1-617-519-5572), or Chuck Harris in National Auditing Services (1-973-236-5340).

Authored by:

Charles E. Harris
Partner, National Auditing Services
Phone: 1-973-236-5340
Email: charles.e.harris@us.pwc.com

In Brief is designed to provide a timely, high-level overview of significant financial reporting developments. It is issued by the National Professional Services Group of PricewaterhouseCoopers LLP. This publication has been prepared for general information on matters of interest only, and does not constitute professional advice on facts and circumstances specific to any person or entity. You should not act upon the information contained in this publication without obtaining specific professional advice. No representation or warranty (express or implied) is given as to the accuracy or completeness of the information contained in this publication. The information contained in this material was not intended or written to be used, and cannot be used, for purposes of avoiding penalties or sanctions imposed by any government or other regulatory body. PricewaterhouseCoopers LLP, its members, employees and agents shall not be responsible for any loss sustained by any person or entity who relies on this publication.