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SOX 404 and the Small Company: Working with the COSO Framework
Sarbanes-Oxley Section 404 requires the development of an accounting control framework for the purpose of fraud risk mitigation and the protection of shareholders. The Act, though, provides no guidance as to standards for fraud risk mitigation and compliance. The COSO framework constitutes the most widely accepted tool for Section 404 remediation among all publicly traded companies. Using the COSO framework effectively, small companies can accelerate the controls development and Section 404 compliance process – reducing cost and achieving compliance more quickly. The COSO framework has become the lingua franca of Sarbanes-Oxley Section 404 compliance. While neither Section 404 itself nor the independent auditors engaged for control remediation specifically requires the use of the COSO framework, no viable alternatives have emerged. This article will deal with strategies for achieving compliance efficiently using the COSO framework. As small publicly traded prepare to comply with Section 404, they need to find the right tools for this daunting endeavor. So far, the COSO framework1 has been the lingua franca of Sarbanes-Oxley Section 404 compliance. While neither Section 404 itself nor the independent auditors engaged for control remediation specifically requires the use of the COSO framework, no viable alternatives have emerged. Fundamental to a successful controls audit is efficiency, and the wide adoption of the COSO framework results in consistent controls remediation across companies, industries, and independent audit firms. You don’t have to use COSO per Sarbanes-Oxley, but good luck finding something else. The COSO framework was developed primarily for controls remediation, and as a result Section 404 compliance, at large publicly companies. As with everything related to Sarbanes-Oxley, the operating assumption that persists in this space entails scaling large-company solutions for small company use. This assumption is flawed. Neither Section 404 nor the COSO framework scales with top line, bottom line, headcount, or other common metrics used to ascertain company size. Small companies have unique needs. The COSO framework outlines an approach to controls remediation that is rigorous and comprehensive – and a bit sophisticated for companies with a market capitalization under $75 million. Albeit late, COSO is developing a controls methodology for use at small and mid-sized public companies. The “small company” methodology, expected to be available this summer, does not provide an immediate solution to OTCBB companies pursuing listing on an exchange, and it may not be ready in time for the small cap compliance deadline of July 2006. Small companies can’t wait until July or August to begin Section 404 remediation projects. It will take months for firms and auditors to figure out what to do with COSO’s small company model in the “real world”. The existing COSO framework, on the other hand, is a known quantity. It may not be the appropriate solution for small companies, but it can be adapted to satisfy the immediate needs of OTCBB companies pursuing an exchange listing. For now, small companies likely will be stuck with the existing COSO controls remediation methodology. It can work – with some planning and flexibility on the part of the small companies seeking compliance. As with Section 404, COSO can work for small companies, as long as small companies take advantage of certain small cap compliance strategies. By using the COSO model, in conjunction with your business expertise, near-term Section 404 remediation for small publicly traded companies is a possibility. [continued...] Want to know more? Download the White Paper "SOX 404 and the Small Company: Working with the COSO Framework" for just $39.95. |
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