How to Comply With Sarbanes-Oxley Section 404: Assessing the Effectiveness of Internal Control

1.1. MANAGEMENT'S EVALUATION OF INTERNAL CONTROL

The Sarbanes-Oxley Act of 2002 (SOX) made significant changes to many aspects of the financial reporting process. One of those changes is a requirement that management provide a report that contains an assessment of an entity's internal control over financial reporting.

Securities and Exchange Commission (SEC) rule 13a-15 (f) defines internal control over financial reporting in this way:

The term internal control over financial reporting is defined as a process designed by, or under the supervision of, the issuer's principal executive and principal financial officers, or persons performing similar functions, and effected by the issuer's board of directors, management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles and includes those policies and procedures that:

1. Pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of the assets of the issuer;

2. Provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the issuer are being made only in accordance with authorizations of management and directors of the issuer; and

3. Provide reasonable ...