Safety/Risk Model - Internal Controls
posted by The Traveller on Sunday, February 06, 2011

(Back to Introduction)

Internal Controls

(accounts for 5% of the final score)

Internal Control over Financial Reporting (100/100)

The Sarbanes-Oxley Act (SOX 404) requires management and the external auditor to report on the adequacy of the company's internal control over financial reporting. Management is required to add an "internal control report" to each annual report with the SEC, which must "contain an assessment, as of the end of the most recent fiscal year of the issuer, of the effectiveness of the internal control structure and procedures of the issuer for financial reporting." (U.S. Code, Title 15, ยง7262)

In this report, management will give details on identified control deficiencies, and if any or all of those constitute material weaknesses, as defined in the standards established by the PCAOB, it will conclude that internal controls are not effective. The cost of complying with Sarbanes-Oxley 404 impacts smaller companies disproportionately, as there is a significant fixed cost involved in completing the assessment. To address this issue, the SEC granted an extension for the outside auditor assessment, currently (with the latest extension of October 2, 2009) until fiscal years ending after June 15, 2010. This temporary rule permits most U.S.-listed Chinese companies to provide only a management report, and the auditor is not required to express an opinion on the effectiveness of the Company's internal control over financial reporting. The PCAOB filed a 62-page document about audits of internal controls, with special guidance for auditors of smaller public companies. It's an interesting read.

  • 100/100 - Effective
  • 0/100 - Not Effective

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At February 08, 2011 12:46 pm , Anonymous Anonymous said...


I have been waiting your comments in ongoing CCME case. Can those fraud allugations be true? There are so many facts saying that it cannot be

1. Insiderbuy of stocks
2. Deloitte as auditor
3. Announced stock dividend!

And of course this:

- tuoki

At February 08, 2011 3:18 pm , Blogger The Traveller said...

About CCME, I don't have anything new and factual to add to the discussion at this point. We are trying to obtain the correct SAT documents (not the ones posted on Seeking Alpha) for both 2009 and 2010 to verify the taxes paid. Also trying to get some more clarity about Deloitte's audit procedures regarding cash balance, revenues and tax expenses.

You are right, there are so many facts saying "it cannot be", but with all these (seemingly orchestrated) short attacks, the best approach will be to prove them wrong with documents and facts. If we can prove revenue and earnings with taxes paid, and cash balance with some more details about how DTT is verifying this (short argument is that CCME would have "faked" their cash balance and fooled Deloitte, which is very far-fetched, but there are precedents like Indian Satyam (SAY) where a Big Four auditor had been fooled), then most of the fraud allegations will break down like a house of cards.

At February 08, 2011 3:22 pm , Anonymous Anonymous said...


- tuoki

At March 12, 2014 6:33 am , Anonymous Financial Services Consulting said...

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