Why Lawyers Should Care about the New COSO Framework

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The Committee of Sponsoring Organizations of the Treadway Commission (COSO) 1992 Internal Control—Integrated Framework has long been recognized as the starting point for designing, implementing and conducting internal control. As most of you now know, the Framework was updated for the first time in May 2013. (See this Doug’s Note.)

What’s the timing for transitioning from COSO 1992 to COSO 2013?

  • COSO says it will consider COSO 1992 to be superseded by COSO 2013 on December 15, 2014, and encourages companies to begin transitioning to the new Framework “as soon as is feasible.”
  • The SEC staff says:

“SEC staff plans to monitor the transition for issuers using the 1992 framework to evaluate whether and if any staff or Commission actions become necessary or appropriate at some point in the future.” (Speech by the SEC’s Chief Accountant, Paul Beswick.)

If anything, the above quote understates the extent to which the staff is expected to monitor company compliance going forward. The SEC is very interested in part because it requires that each company adopt a “suitable framework” for compliance with the Section 404 internal control provisions of the Sarbanes-Oxley Act. In fact, it is standard practice to reference the COSO Framework in Management’s Report on Internal Control Over Financial Reporting and in the independent auditor’s related attestation. It is hard to imagine that the SEC staff would conclude that a company is in compliance with this requirement if it still uses COSO 1992 after December 15, 2014.

Yet, this 2014 Sarbanes-Oxley Compliance Survey by Protiviti states that, as of May 2014, 36% of companies have not yet begun to ensure the effectiveness of their internal controls using the COSO 2013 guidance, and 23% more say they have “just started” and are less than a quarter of the way there.

Why should the legal department care?

Admittedly, the COSO Framework is primarily about internal control and, therefore, is primarily the finance department’s concern. Nevertheless, COSO 2013 also reflects recent trends in a number of compliance, regulatory, governance and risk management areas that go well beyond mere internal control and financial reporting.

Failure to be ready for the December 15th deadline could have the following consequences:

  • Non-compliance with the SEC’s “suitable framework” standard for Section 404 compliance.
  • A possible (likely) comment letter the next time your SEC filings (Securities Act or Exchange Act) are reviewed.
  • Concerns as to whether the Section 302 CEO and CFO certifications are accurate.
  • Difficulty obtaining independent auditor agreement with management’s assessment of the effectiveness of its internal controls, as well as unpleasant discussions about deficiency or weakness.
  • Issues regarding whether the Audit Committee is properly overseeing internal control and financial reporting.
  • Concerns regarding the effectiveness of the company’s enterprise risk management.
  • Negative investor reaction.

Action Steps… • 

  • Determine the current status and future timeline of your company’s transition to COSO 2013.
  • Be sure your Disclosure Committee, Audit Committee and Board of Directors are fully informed regarding the company’s transition plan.
  • Clearly disclose during the transition period whether your company uses COSO 1992 or COSO 2013.
  • Confirm that the CEO and CFO SOX certifications will be accurate after December 15, 2014.
  • Review any changes due to COSO 2013 in light of COSO’s 2004 Enterprise Risk Management—Integrated Framework since internal control is an integral part of the larger enterprise risk management picture.

For more information…

Here are links to COSO’s updated Framework:

 

Topics:  COSO, Internal Controls, Sarbanes-Oxley, SEC

Published In: General Business Updates, Finance & Banking Updates, Securities Updates

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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