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Management

What are the Annual Report on ICFR requirements?
What is the framework type most commonly used?
What is involved with using a framework for evaluating ICFR?
Who should conclude on the assessment of ICFR?
What is at risk?




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  What are the Annual Report on ICFR requirements?

There are four disclosure requirements to the Annual Report on ICFR as defined by Item 308(a) of SEC Regulation S-K (§229.308): 

  1. A statement of management's responsibility for establishing and maintaining adequate ICFR for the registrant; 
  2. A statement identifying the framework used by management to evaluate the effectiveness of the registrant's ICFR; 
  3. Management's assessment of the effectiveness of the registrant's ICFR as of the end of the registrant's most recent fiscal year, including a statement as to whether or not ICFR is effective. This discussion must include disclosure of any material weakness in the registrant's internal control over financial reporting identified by management. Management is not permitted to conclude that the registrant's ICFR is effective if there are one or more material weaknesses in the registrant's ICFR; and,
  4. If the registrant is an accelerated filer or a large accelerated filer, or otherwise includes in its annual report a registered public accounting firm’s attestation report on ICFR, a statement that the registered public accounting firm that audited the financial statements has issued an attestation report on the registrant’s ICFR.





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  What is the framework type most commonly used?

The Internal Control – Integrated Framework, by The Committee of Sponsoring Organizations of the Treadway Commission (COSO) is by far the most common framework used by SEC registrants for evaluating ICFR. This does not mean that the COSO Framework is the only option, as the SEC mentions other control frameworks that they consider suitable.





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  What is involved with using a framework for evaluating ICFR?

In addition to disclosing the framework used to evaluate the effectiveness of ICFR in the annual Form 10-K report, management must maintain documentation to provide reasonable support for their assessment. This means that you need evidence to support utilizing the COSO Framework in the evaluation process unless another framework is cited in the Annual Report on ICFR. Simply referencing a framework in the Annual Report on ICFR is not sufficient as there must be evidence of how relevant facets of the framework were utilized. For the COSO Framework, this means that all five components and 17 principles must be concluded upon unless a principle is not deemed relevant.





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  Who should conclude on the assessment of ICFR?

It is ultimately management’s responsibility, as led by the CEO and CFO, to conclude on their assessment. However, the internal audit function should be an integral part of the ICFR evaluation process to provide an independent prospective. We provide such services through both outsourcing and co-sourcing options.





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  What is at risk?

SEC staff enforcers have been investigating and prosecuting a broader range of ICFR violations than ever before, thus raising the stakes for certifying officers and others involved in the financial reporting process. While it is true that the language of the Annual Report on ICFR seldom changes from year- to-year, the evaluation process in concluding on the effectiveness of ICFR typically does thanks to new accounting changes, evolving risks, merger and acquisition transactions, new personnel, changing operating environments, etc. Don’t underestimate the ICFR evaluation effort.



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