Companies that have begun implementation of Section 404 are finding it effective to break their work into five phases: planning, assessing enterprise controls, pilot documenting and testing, rollout, and reporting.
In this initial phase, a [section] 404 steering committee is formed, a risk assessment be performed, as well as processes are prioritized and mapped to financial statements. A type element of this phase is evaluating the extent to which existing FDICIA documentation can be used in the [section] 404 process. A documentation format also is selected, and technology tools are chosen. Finally, the steering committee confirms the external auditor’s expectations. Assessing enterprise controls. Corporate governance plus management controls, as well as information technology (IT) controls (both general and application specific), are identified plus assessed for effectiveness.
From one to three processes are documented, and controls are tested during this phase. Results are reviewed with the steering committee, including the external auditor, and the control approach is refined.
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Control documentation and testing are rolled out to centralized processes, then to decentralized locations. Any control deficiencies are reported and fixed.
In this final phase, documentation and testing results are summarized through year-end.
Beyond simply preparing to comply with Section 404, a number of companies are determined to take full advantage of their implementation process. Because these organizations typically are using the assessment and control framework developed by the Committee of Sponsoring Organizations (COSO, a voluntary organization dedicated to improving financial reporting quality), they have an integrated, comprehensive model for conceptualizing the control of all types of business risk. Thus, they can use COSO to evaluate not only their controls over financial reporting as mandated by Section 404 but also those over operational effectiveness and efficiency and compliance with laws and regulations. In many cases, the initial focus will be on meeting the expanded requirements to document, evaluate, and test financial controls with an intent to expand to additional controls in future years.
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