Risk Controls

Sarbanes Oxley implicitly goes beyond the traditional financial accounting at a given point of time or at the end of the financial year by requiring that auditors examine both the internal controls over financial reporting as well as financial reports for any material weaknesses. Since the tests for the material weakness of financial statements can only be done over a period of time, they end up scrutinizing the stability of the finances of companies over an extended period of time. The Public Company Accounting Oversight Board spells this out in its Audit Standard 2 which requires company wide operating effectiveness of controls. The operating effectiveness can only be tested for a number of periods of time. The reconciliation of cash receipts, for example, would be free from material weakness if the test is successful for a number of days or months. Similarly, controls over debt management would not be complete unless the auditors also study the controls over all the inter-connected departments of the company and the effect each of them separately and all put together could have on the solvency or the financial health of the company. The comprehensive examination of the controls and the exposure of the company to operating risks have broken new ground since it takes an integrated view of the exposure of the company to risks. This is only a short step away from enterprise risk management systems.

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