Internal Controls in the Global Organization

Internal control is an essential component of organizational governance that helps ensure the effectiveness, efficiency, and integrity of operations. For a global organization, with operations spread across different countries and regions, implementing robust internal controls becomes even more critical. Here are key aspects of internal control that are important for a global organization:

1. Control Environment: The control environment sets the tone for the organization and influences the control consciousness of its employees. It encompasses factors such as management's integrity and ethical values, commitment to competence, and the organization's overall risk appetite. A global organization should establish a strong control environment that is aligned with its values and takes into account cultural differences across various locations.

2. Risk Assessment: A thorough risk assessment process is crucial for identifying and evaluating risks that could impact the achievement of the organization's objectives. For a global organization, the risk assessment should consider both global and local risks, taking into account factors such as legal and regulatory requirements, geopolitical risks, currency fluctuations, and cultural nuances. This assessment forms the basis for designing effective internal controls.

3. Control Activities: Control activities are the specific policies, procedures, and practices implemented by an organization to mitigate risks and achieve its objectives. In a global organization, control activities should be tailored to address the unique risks associated with each location while also ensuring consistent adherence to global policies and standards. Examples of control activities include segregation of duties, authorization and approval processes, physical safeguards, and IT controls.

4. Information and Communication: Effective communication and information flows are essential for internal control. A global organization should establish clear communication channels to disseminate policies, procedures, and control-related information across different locations. It should also ensure that relevant information is captured accurately, timely, and in a manner that facilitates decision-making, compliance, and monitoring. Robust information systems and reporting mechanisms should be in place to support these objectives.

5. Monitoring: Regular monitoring and evaluation of internal control effectiveness are critical to identify deficiencies, assess their impact, and take corrective actions. Monitoring can be achieved through ongoing supervision, internal audits, self-assessments, and external assessments where appropriate. In a global organization, monitoring should encompass both centralized and decentralized mechanisms to provide reasonable assurance over controls at various levels.

6. Compliance and Legal Considerations: Global organizations need to navigate a complex web of legal, regulatory, and compliance requirements across multiple jurisdictions. Internal controls should include measures to ensure compliance with applicable laws, regulations, and industry standards in each country of operation. This involves staying updated with changes in regulations, maintaining effective compliance programs, and conducting periodic assessments to ensure adherence.

7. Ethical Conduct and Fraud Prevention: Promoting a culture of ethical conduct and preventing fraud is vital for any organization, including global ones. Internal controls should include measures to detect and deter fraudulent activities, such as establishing a whistleblower hotline, conducting periodic fraud risk assessments, and implementing anti-corruption and anti-bribery policies. Training programs and awareness campaigns should be conducted to educate employees about ethical standards and their responsibilities.

By addressing these key aspects of internal control, a global organization can enhance its operational efficiency, minimize risks, safeguard assets, and ensure compliance with applicable laws and regulations across its diverse operations.

IASB considers delay in revenue recognition standard

The IASB had previously set an implementation date of January 1, 2017 for its new revenue recognition standard.  The Journal of Accountancy is reporting that the IASB is seeking feedback on a delay of the effective date to January 1, 2018.  Early application would be permitted. 

From the Journal of Accountancy:

Upon issuing the standard jointly with FASB in May 2014, the IASB set an effective date of Jan. 1, 2017. But discussions of implementation difficulties with the boards’ joint transition resource group have led the boards to decide to propose targeted amendments to assist financial statement preparers in implementation.

The discussion led the boards to propose the delay; the IASB’s new effective date for IFRS 15, Revenue From Contracts With Customers, would be Jan. 1, 2018, if the delay is approved. Early application would be permitted.

The IASB is seeking comments on the proposed delay. Comments, which are due July 3, can be submitted at the IFRS website. Feedback is scheduled to be considered at the IASB’s meeting in July, when the board plans to decide whether to change the effective date.

In addition, the IASB plans to issue an exposure draft of targeted amendments to the revenue recognition standard, which will include clarifying some of its requirements and adding illustrative examples to assist implementation.

Indian commerce group pushes back on the implementation of IFRS

The Federation of Indian Chambers of Commerce and Industry (FICCI) is pushing back against the Indian Ministry of Corporate Affairs (MCA) on the adoption of IFRS.  As of now, the MCA wants Indian businesses with a net worth of Rs 1,000 crore to convert to IFRS by April 2011.

As FICCI notes, the standards are still being developed and it doesn't necessarily make sense to implement the standards when they are still undergoing revision.  While they're at it, they're also pushing back on the possible requirement that companies will need to produces parallel statements according to both Indian GAAP and IFRS.

You can read the full article at: Ficci demands delay in implementation of IFRS

Spotlight on Brazil’s plans to adopt IFRS

Brazil has been the biggest success story in Latin America.  It has an increasing large role in both Latin America and across the globe.  An article at the IFRS Foundation website discusses Brazil's move to full integration of International Financial Reporting Standards with a target of December 2010.

An excerpt from the article:

Brazil has a broad-based economy and a highly developed financial sector” says Alexandre Tombini, Deputy Governor for Financial System Regulation and Organization at the Central Bank of Brazil.”With the increasing global economic and financial integration of our country, it has become clear for us at the Central Bank of Brazil that convergence with internationally accepted accounting standards is of utmost importance. Our belief is that high-quality standards are one of the key ingredients of efficient allocation and use of scarce economic resources and comparable financial information plays a key role in the financial decision-making process of investors”.

“High-quality corporate reporting is essential for attracting and protecting investors not only because of comparability but also due to its close relationship with good governance, accountability and responsibility, enhancing investors’ confidence in the information prepared in such an environment”, says Tombini. “Corporates should, in theory, benefit when they provide comprehensive, relevant and timely information on their financial conditions, performance, and risk management practices. Such businesses should be able to access capital markets more efficiently than similar companies that do not provide information in the same level and thus reducing the cost of capital, and as already said, making the allocation of economic resources more efficient”, he says.

The gradual convergence of Brazilian GAAP with IFRS was set in train in 2006 for financial intermediaries under the supervision of the Central Bank and in 2008 for public companies with a deadline of 2010 for full convergence. In January this year a Memorandum of Understanding was signed between the relevant Brazilian accounting bodies and the IASB which confirmed the end of 2010 as the target date for full convergence and established a framework for future cooperation between the accounting bodies and the IASB.

You can read the full article here.

SEC Proposes Move Away From US GAAP Reconciliation

The SEC currently has a proposal out to eliminate the requirement that currently exists for foreign companies to reconcile their financial statements to US GAAP.  Under the proposal, companies may avoid the reconciliation process if they follow the English language version of International Financial Reporting Standards. 

The proposal is called Acceptance From Foreign Private Issuers of Financial Statements Prepared in Accordance With International Financial Reporting Standards Without Reconciliation to U.S. GAAP.  The release number is 33-8818.  Comments are due by September 24, 2007.

While there may be changes to the proposal based on feedback, my guess is this proposal will be finalized in some form.  There is strong momentum behind the idea of moving to international reporting standards.  This will be a key step in that movement.

FASB and IASB Issue Convergence Memorandum

The FASB and IASB issued a joint Memorandum of Understanding that outlines the desired goals and focus areas for convergence standards.  The memorandum outlined 11 areas of focus:

1. Business Combinations
2. Consolidations
3. Fair Value Measurement Guidance
4. Liabilities and Equities Distinctions
5. Performance Reporting
6. Post Retirement Benefits (including Pensions)
7. Revenue Recognition
8. Derecognition
9. Financial Instruments
10. Intangible Assets
11. Leases

One of the points emphasized is that the convergence program is not interested in simply picking one standard over the other, but rather to assess areas where improvement is needed and generate new standards that better serve investors and other relevant stakeholders.  The full text of the Memorandum is here.

IFRS on the move

It has long been a commonly held belief among U.S. corporations that international accounting standards would evolve towards U.S. GAAP.  However, it hasn't quite worked out that way.  International accounting standards, under the auspices of the International Accounting Standards Board, have been developing in ways that are not always congruent with U.S. standards.  Additionally, foreign companies may not need to reconcile international reporting requirements to U.S. GAAP before raising capital in the United States.  It'll be interesting to see how these competing interests shape up in the coming years.

CFO.com has an article that discusses this trend in greater detail.  Click here for the full story.