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Commission Guidance Regarding Management’s Report on Internal Control Over Financial Reporting
Release Nos. 33-8810; 34-55929; FR-77; File No. S7-24-06, 06/20/2007
Basic Information
This issuance of the Securities and Exchange Commission (SEC) is an interpretive release that seeks to guide management in its task of examining the company’s internal control over financial reporting (ICFR). The release took effect on June 27, 2007. It provides an approach that management can use in undertaking an “evaluation of internal control over financial reporting.”
By conducting an evaluation that is compliant with this interpretive guidance, management would in effect fulfill the mandates imposed by Rules 13a-15(c) and 15d-15(c) under the Securities Exchange Act of 1934.
The issuance of this Interpretive Guidance by the SEC is pursuant to its position that management should be able to design an evaluation process that satisfies the needs of the company and enables it to determine whether its ICFR is appropriate. The SEC believes that this interpretive release will grant management the flexibility to make such a suitable design.
The issuance is based on what the SEC calls as “two broad principles”: the first principle provides that management should be able to assess whether the controls that it has undertaken, if any, is able to detect the risk that a material misstatement of the financial statements would not be discovered or prevented in a timely manner. The SEC ensures that this interpretive release provides a “top-down, risk-based approach” to this principle, including provisions for the role of “entity-level controls in assessing financial reporting risks and the adequacy of controls.”
The second principle on which this interpretive release is grounded is stated this way: “management’s evaluation of evidence about the operation of its controls should be based on its assessment of risk.” Stated another way, management’s evaluation procedures should be able to detect whether the financial statements can be claimed to be materially accurate, and discover those portions of its financial reporting that can not be claimed to be reliable.
This release is related to the other rules or releases previously issued or about to be issued by the SEC. This includes amendments to Exchange Act Rules 13a-15(c) and 15d-15(c) and revisions to Regulation S-X.15.
The amendments to Rules 13a-15(c) and 15d-15(c) will make it clear that an evaluation “that is conducted in accordance with this interpretive guidance is one way to satisfy the annual management evaluation requirement in those rules,” and the rule that seeks to define the term “significant deficiency.”
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