Internal control matters...again: Motorola's senior vice president and controller tells Financial Executives Research Foundation (FERF) how "COSO" recommendations--published a decade ago--helped his firm improve its system.

• Author: Sinnett, William M.
• Position: Governance

For the third time in 24 years, the Securities and Exchange Commission (SEC) has proposed an internal control report requirement, and this time it is serious.

In 1979, following enactment of the Foreign Corrupt Practices Act (FCPA), the SEC proposed rules that would have required a company to annually disclose certain information about its internal accounting controls. This proposal was criticized, and the SEC backed down and allowed the private sector to develop its own initiative.

In 1988, following the recommendations of the Tread-way Commission, the SEC proposed rules mandating that companies include in their annual reports a section on management's responsibility for the company's internal control system, and an assessment of its effectiveness. But, again the SEC allowed the private sector to promote its own recommendations, which were published in 1992 by the Committee of Sponsoring Organizations (COSO) as Internal Control -- Integrated Framework.

Then, in 2002, Section 404 of the Sarbanes-Oxley Act directed the SEC to prescribe rules requiring annual reports to contain an internal control report. The SEC responded with proposed rule 33-8138, "Disclosure Required by Sections 404, 406 and 407 of the Sarbanes-Oxley Act of 2002." (The SEC approved final rules in late May.) The proposal referred to the COSO framework, which, in turn, drove many executives to purchase copies, while wondering how to implement the framework. (For more on COSO and its publications, see "Resources" on page 62.).

With internal control at the forefront again, one exemplary company is Motorola Inc. FERF has long had an interest in Motorola's management style, having featured the firm as a case-study company in a 1993 publication, Finance in the Quality Revolution. One of the earliest U.S. quality pioneers, Motorola -- a winner of the 1988 Malcolm Baldrige National Quality Award the first year it was offered -- remains one of the few large companies to have won the award for company-wide activities.

Motorola was again featured in FERF's 1995 publication, Reengineering the Finance Function, which described how Motorola applied Six Sigma principles to the monthly closing process. "Six Sigma" is a statistical measure of "virtual perfection" (picture the far-end of the tail of a bell curve), and represents a defect rate of only 3.4 errors per million opportunities.

Since the research studies referred to above were published while Ken Johnson was vice president and...