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NALC What's New... Read the latest NALC publications: In the News
Upcoming Meetings Register Today
2012 Spring Conference
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Sarbanes-Oxley Section 404 ImplementationLarry
Johnson, Assistant VP of Operations The NAIC continues to press for the adoption of Sarbanes-Oxley provisions, including the Section 404 internal control reporting requirements, for all insurance companies. While Sarbanes-Oxley continues to be heavily discussed within the NAIC, insurance companies should begin preparing for the possibility of Section 404 reporting. During the NALC Spring Meeting, Larry Johnson, Assistant Vice President of Operations for Investors Heritage Life Insurance Company, gave attendees an understanding of the intricacies of Section 404 via discussion of his experience in implementing Section 404 in a small company environment. The presentation focused on the requirements of Section 404, the framework used in developing management’s report on internal control, the auditor attestation process, challenges in the process and the keys to success. Currently, the recognized framework for internal control reporting is the Committee of Sponsoring Organizations of the Treadway Commission ("COSO") Internal Control – Integrated Framework. This framework does not differentiate among companies based on size or complexity, although the Securities and Exchange Commission is considering potential changes to Section 404 to enhance its effectiveness in a small company environment. To satisfy the Section 404 reporting requirements, management must consider all significant financial reporting aspects of a company’s operations, including the effectiveness of senior management and the tone they set within the organization. Ultimately, both management and the external auditor must test the key controls over financial reporting in order to validate management’s assessment of the internal control environment. Potential reportable items include those items identified as "significant deficiencies", which are reportable to audit committees, and "material weaknesses", which are discussed in and affect the external auditor’s opinion on management’s assessment of their internal control environment. The most significant challenges facing small companies in the process include the significantly increased external audit and potential third-party consulting costs, the lack of internal resources, an inability to perform independent controls testing, the somewhat different interpretation of the requirements among various external auditors, and the effect of this increased work on normal strategic operations. |
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