T H E I N S T I T U T E O F I N T E R N A L A U D I T O R S
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William G. Bishop III, CIA
August 19, 2002
Securities and Exchange Commission
G. Katz, Secretary
450 Fifth Street, NW
Washington, DC 20549-0609
VIA E-MAIL: firstname.lastname@example.org
RE: Proposed Rules for Certification of Quarterly and Annual Financial Information by Principal Executive Officer and Principal Financial Officer
The Institute of Internal Auditors (IIA) appreciates the opportunity to comment on the SEC's proposed rules changes for Certification of Disclosure in Companies' Quarterly and Annual Reports. The IIA supports this significant initiative to enhance corporate accountability and improve governance processes for public companies. In fact, we believe the recommendations can form the basis for improving accountability and governance in organizations that do not file financial information with the SEC as well.
We applaud the proposed rule changes. The Institute believes that internal auditors, together with boards, senior management, and external auditors, are the cornerstones of the foundation on which effective corporate governance must be built. However, the proposed rule change does not mention the role of internal auditing. We recommend that the new rules for certification by the CEO and CFO require reporting companies to establish and maintain an independent, adequately resourced, and competently staffed internal auditing function, as do the recently proposed NYSE Corporate Accountability and Listing Standards. Further, we believe that this internal audit function's work should be performed in accordance with the Standards for the Professional Practice of Internal Auditing. By requiring that internal audit work be performed in accordance with the Standards, audit committees and boards gain additional assurance that their organization's internal controls are adequate to protect the public trust in the financial reporting system.
The fact that internal auditors are integral to good corporate governance has been demonstrated in the WorldCom situation, where internal auditors played a major role in surfacing and helping disclose the accounting "errors" instigated by certain key management officials. The WorldCom situation also highlights the advantages of an internal audit function that is independent of the financial reporting structure of an organization. We believe that the internal auditing function should report directly to the audit committee and administratively to the principal executive officer.
We also believe that the effect of weak or missing controls over business decisions may not be reflected in a company's financial reporting process for several years. Therefore, the SEC's current approach of certification of the effectiveness of internal controls for financial reporting does not create the level of accountability the investing public requires to regain its confidence in publicly traded companies. We recommend that you require public reporting on the effectiveness of all internal controls, rather than limiting disclosures to internal controls over financial reporting. The most authoritative and accepted definition of internal control was developed by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), and this definition includes effectiveness and efficiency of operations, reliability of financial reporting, and compliance with applicable laws and regulations. We believe that investors are best protected when all three dimensions of the internal control model are working effectively, and we urge that this definition be adopted.
Established in 1941, the Institute of Internal Auditors is an international professional organization with world headquarters in Altamonte Springs, Florida. The IIA has over 78,000 members in internal auditing, governance, internal control, IT audit, education and security. With representation from more than 120 countries, the Institute is the acknowledged leader in standards, certification, education, research and technological guidance for the profession worldwide.
Thank you again for allowing The IIA to provide our comments on these important issues. If The IIA can provide further assistance, please feel free to call me.
William G. Bishop III, CIA