For over a decade, public companies in various countries, including the United States, Canada, Brazil, and Turkey, have been mandated to implement Internal Control over Financial Reporting (ICFR), particularly as part of issuer audits. While some organizations may perceive ICFR requirements merely as regulatory obligations, they might overlook the opportunities to unlock hidden value and enhance their overall internal control system.
Unfortunately, discussions around ICFR often focus on meeting regulatory expectations, neglecting the crucial aspect of understanding the intent behind Internal Control over Financial Reporting. This oversight is particularly relevant in Nigeria, where new regulations from the Securities and Exchange Commission (SEC) require listed entities to comply with ICFR by the end of their fiscal year in 2021.
In this article, we will delve into the intent, importance, and challenges of ICFR, considerations for its implementation, and best practices for compliance.
Why is ICFR Important?
In the 1990s, high-profile cases of corporate fraud, such as those involving Xerox and Global Crossing in the USA, eroded investor confidence and prompted a reevaluation of regulatory standards for financial reporting. The fraudulent activities, including publishing false financial statements to manipulate stock prices, led to a significant loss of market value, totaling almost $6 trillion.
In response to these events, the Sarbanes-Oxley Act (SOX) of 2002 was enacted by the United States Congress. SOX imposed stringent penalties on wrongdoers and mandated reforms to securities regulations to protect investors from fraudulent financial reporting. This marked the beginning of the era of ICFR, aiming to enhance the credibility of corporate financial statements.
Compliance Requirement in Nigeria
The Securities and Exchange Commission (SEC) in Nigeria issued guidelines for the implementation of Sections 60-63 of the Investment Securities Act, requiring public companies to report on the effectiveness of their ICFR in their annual reports starting from the December 2021 financial year-end. Quoted companies in Nigeria are obligated to undergo an integrated audit, including an external auditor’s assessment of ICFR effectiveness and an annual managerial evaluation of internal controls.
Objective of Internal Control over Financial Reporting
ICFR aims to safeguard the interests of investors and stakeholders by preventing fraud and financial crimes resulting from poor reporting by publicly traded companies. Regulatory bodies worldwide view ICFR engagements as opportunities for public companies to enhance the quality and efficiency of their financial reporting practices. Understanding the objective of ICFR underscores its importance in maintaining the integrity of financial reporting systems.
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