Internal control focus critical as a result of pandemic changes

For many organizations, the coronavirus pandemic has led to significant changes in day-to-day operations, working environments, and internal controls.

SEC Deputy Chief Accountant Diana Stoltzfus reminded company officers of their duties related to these controls Monday during a session at the AICPA Conference on Current SEC and PCAOB Developments. She cited the requirements of the Sarbanes-Oxley Act of 2002 (SOX), P.L. 107-204.

“Part of management’s responsibilities as a result of Sarbanes-Oxley include the requirement for officers to certify information contained in annual and interim reports,” she said. “Among other things, the rules require that officers certify that they have included an evaluation of internal controls, including whether there have been any significant changes in an entity’s internal controls.”

Remote operations can lead to disruptions in internal controls that companies need to consider in their financial reporting. Stoltzfus said that with many businesses operating remotely and many employees working from home, there may be changes in how some processes and existing controls are operating.

In addition, she said the impact of COVID-19 may also introduce new business risks for certain companies. These new risks may require new or additional controls and procedures.

“Entities will need to consider how changes in working environment and/or business risks will affect their internal controls and will need to evaluate any potential changes to required disclosures,” she said.

In a statement issued Monday, SEC Chief Accountant Sagar Teotia also emphasized the importance of internal control over financial reporting (ICFR) and disclosure controls and procedures (DCP).

“Management is required to evaluate the effectiveness of its ICFR at the end of each fiscal year, and DCP at the end of each fiscal quarter,” Teotia said. “We understand that many registrants made changes during the past year to their financial reporting processes in a remote work environment. As we have said in the past, we remind preparers that if any change materially affects, or is reasonably likely to materially affect, an entity’s ICFR, such change must be disclosed in quarterly filings in the fiscal quarter in which it occurred (or fiscal year in the case of a foreign private issuer).”

Teotia also highlighted the importance of well-reasoned judgments and estimates, which he said can be particularly challenging in an environment of increased uncertainty or volatility.

“Certain judgments and estimates can be particularly challenging in an environment of increased uncertainty or volatility,” he said. “As we have previously stated, OCA [Office of the Chief Accountant] staff has consistently not objected to well-reasoned judgments made by companies, and we will continue to apply this perspective. Companies should also ensure that significant judgments and estimates are disclosed in a manner that is understandable and useful to investors, and that the resulting financial reporting reflects and is consistent with the company’s specific facts and circumstances.”

— Ken Tysiac (Kenneth.Tysiac@aicpa-cima.com) is the JofA’s editorial director.