Sarbanes-Oxley

Internal Control over Financial Reporting

UNDER THE SARBANES-OXLEY ACT OF 2002, U.S. public companies are now subject to new requirements for management and independent auditors to report on the effectiveness of internal control over financial reporting. Effective internal controls are fundamental to investor confidence in financial reporting because they help to deter fraud and to prevent inaccurate financial statements. With more than half of U.S. households investing in the capital markets, either directly or through retirement funds, these new requirements are expected to have a significant beneficial impact on the capital markets.

One of the most visible changes that investors will notice is the new reports by management and the independent auditor on a companys internal control over financial reporting. A primary purpose of this publication is to help investors and other financial market participants better understand and interpret these new reports, which will be provided in addition to the independent auditors report on the companys external financial statements.

Effective Internal Control over Financial Reporting

Internal control over financial reporting is a process designed and maintained by a companys management to provide reasonable assurance about the reliability of financial reporting. Effective internal control over financial reporting is vital to the proper recording of transactions and the preparation of reliable financial reports. An effective internal control process is comprehensive and involves people at all levels throughout a company, including those who keep accounting records, prepare and disseminate policies, and monitor systems, as well as people in a variety of operating roles. In addition, the process is influenced by a companys board of directors and its audit committee, which has responsibility for oversight of the financial reporting process. Under Section 404, a companys management must assess the effectiveness of internal control over financial reporting as of the companys fiscal year-end. The independent auditor will then report on managements assessment, and on the effectiveness of the companys internal control over financial reporting.

An Investor Resource Guide PDF