Strategic Finance Getting a Better Handle on Compliance and Controls
By Isaac Tucker
Accounting organizations are at the center of a broad array of change: global tax regulation, domestic tax changes, and major revisions to audit reporting. Many also are affected by far-reaching rules that now dictate how they must treat, recognize, and report revenue, all while having to contend with rapidly shifting business and operating models.
Given the complex regulatory and operating landscape that most organizations must now navigate, it comes as no surprise that effectively managing internal controls to support financial reporting is top of mind. Accounting and finance organizations —including financial professionals like you who keep them humming—are challenged to operate efficiently and still drive strong comprehensive controls.
INCREASING CHALLENGES
As most of you already know, globalization, intercompany trade, and mergers and acquisitions have increased the volume of transactions that impact every part of the business, including the close. They’ve also created more risk in downstream financial and regulatory reporting. The regulatory environment itself has also grown, both in scope and in depth, increasing exposure while placing pressure on precious accounting resources to cover even more bases.
For example, accounting, tax, and treasury teams face increasing intercompany reporting challenges from base erosion and profit shifting (BEPS) tax rules, which aim to level the playing field for companies that don’t have a substantial presence globally. These same teams face a widening set of regulatory requirements from new Internal Revenue Service (IRS) tax rules to new Financial Accounting Standards Board (FASB) revenue recognition standards.
All these factors are competing for often already strained resources that are also required for financial controls, such as continued compliance with the Sarbanes-Oxley Act of 2002 (SOX).
It’s no wonder that, more than 15 years since the introduction of SOX, improving efficiency is still a top priority for financial executives. In a survey conducted by the SOX & Internal Controls Professionals Group, which has more than 3,000 members, study respondents identified improving the efficiency of the SOX function as a top objective, followed by ensuring compliance with SOX and other regulations and strengthening organizational relationships across SOX owners.
WEAKNESSES ELEVATE FRAUD RISK
Improving efficiency, while at the same time combating fraud, has kept many in the C-suite up at night. Specifically, weak controls can leave an opening for fraud risk.
A 2017 study by the American Accounting Association found that companies with material weaknesses in their entity-level controls were 90% more likely to have future fraud disclosures compared to companies with strong controls. In fact, when evaluating 127 unique fraud cases, researchers found a strong association between entity-level controls and a subsequent revelation of fraud.
This is forcing accounting and internal audit teams to spend more time reevaluating risks and their mitigating controls to make sure both are properly designed and effective. They have to walk a line between strong control coverage and an overly controlled environment.
The study concluded that “the issuance by an auditor of an adverse internal control opinion is a ‘red flag,’ indicating a higher probability that managers are committing (unrevealed) fraud.”
This is an abstract. For the full article, please click here.
|