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Private Equity: History, Governance, and Operations, Second Edition by ADAM A. WADECKI, JAMES P. MARTIN, LOUIS W. PETRO, HARRY CENDROWSKI

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Chapter 10

Value of Internal Control

James Martin

Louis Petro

Companies at the leading edge of discovering additional value in internal controls have developed techniques proven to drive more predictable revenue, minimize outstanding receivables, reduce operational costs, and even improve a company's performance.

—David R. Campbell et al.1

Introduction

Emphasis on strong internal control has been amplified across organizations of all sizes in recent years. Most notably, regulation such as Section 404 of the Sarbanes-Oxley Act of 2002 (SOX) and subsequently the Public Company Accounting Oversight Board's (PCAOB's) adoption of Auditing Standard No. 5 (AS 5), which together require all publicly registered firms in the United States to receive an audit of management's assessment of the effectiveness of internal control over financial reporting. Though the Dodd-Frank Wall Street and Consumer Protection Act of 2010 exempted some small, publicly traded firms (aka nonaccelerated filers) from portions of Section 404, Section 404 remains a significant element of securities law, and many of its implications have trickled down to private firms.

This chapter will focus on the value of internal control, for both the private equity (PE) firm, and the PE firm's target companies. Internal control will be considered from an operational improvement perspective, financial reporting perspective, and compliance perspective. When internal control is considered in this holistic approach, the value added ...

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