Revised OMB Circular A-123: SOX for Federal Agencies

By Hawkins, Kyleen W.; Hardwick, Kim | The Journal of Government Financial Management, Fall 2005 | Go to article overview
Save to active project

Revised OMB Circular A-123: SOX for Federal Agencies


Hawkins, Kyleen W., Hardwick, Kim, The Journal of Government Financial Management


On December 21, 2004, the U.S. Office of Management and Budget (OMB) sent a memo to federal agency CFOs, COOs, CIOs and program managers announcing a rewrite of OMB Circular No. A-123, Management's Responsibility for Internal Control. The revisions to OMB A-1 23 are in response to the Sarbanes-Oxley Act of 2OO2, which contains increased internal control responsibilities for management and auditors of publicly traded companies.

The OMB revisions are an effort to help ensure that federal agencies' fiduciary responsibilities for public funds are fulfilled by strengthening requirements related to evaluating, documenting and reporting on internal controls. The internal control standards introduced by the rewrite are those found in the Committee of Sponsoring Organizations (COSO) control framework (described below). While the circular mainly relates to controls over financial reporting, agency management is also responsible for establishing and maintaining internal control to ensure effective and efficient operations and compliance with laws and regulations. Internal control requirements relate equally to the design of the control structure and the effective operation of the control structure over time, and are effective for fiscal year 2006. Agencies are encouraged to take steps in fiscal 2005 to prepare for the new requirements.

Background

From the Foreign Corrupt Practices Act of 1977 to the Sarbanes-Oxley Act of 2002 (SOX), concern has been growing over the ability of organizations to prevent fraud and ensure accurate financial reporting. Despite early efforts of the securities and Exchange Commission (secX the American Institute of Certified Public Accountants (AICPA) and other organizations to promote the establishment of proper control systems, the 1980s saw myriad financial failures in the banking industry. Failures were particularly acute in savings and loan (S&L) institutions where S&Ls were losing money because of skyrocketing interest rates and a mismatch of assets and liabilities. In the short period between 1980 and 1982, S&L income plummeted from a high of $781 million to a low of negative $4.6 billion. During this same period, 118 S&Ls with $43 billion in assets failed. In addition to operational problems, numerous instances of fraud were uncovered in S&Ls and other institutions, including financial reporting frauds that served as attempts to hide some of the catastrophic losses that led to the business failures.

It was in the wake of the S&L crisis that the U.S. model for internal control was born. This model was developed by a committee formed in 1985 from five accounting organizations, which sponsored the National Commission on Fraudulent Financial Reporting, an independent, private sector organization that studied the causal factors that led to the fraudulent financial reporting of the 1980s. The National Commission on Fraudulent Financial Reporting was known as the Treadway Commission, so named after its chairman, James C. Treadway Jr. After delivering their report in 1987, the organizations that sponsored the Treadway Commission were asked to develop guidelines for companies to use in evaluating and improving their internal controls. So, the Treadway Commission's COSO developed a model of internal control called Internal ControlIntegrated Framework. However, the document, which has become the U.S. model for internal control, is simply referred to as "COSO."

From the time it was first published in 1992 until the passage of the Sarbanes-Oxley Act of 2002, implementation of the COSO model was largely voluntary and, therefore, sporadic at best. Only certain financial institutions with assets of more than $500 million were required to have internal certifications and external audits on their internal controls. COSO principles served as the benchmark for these attestations.

Much like the S&L crisis of the 1980s, the late 1990s and early 200Os saw a rash of financial frauds and business failures, including Enron, WorldCom, Tyco and others.

The rest of this article is only available to active members of Questia

Sign up now for a free, 1-day trial and receive full access to:

  • Questia's entire collection
  • Automatic bibliography creation
  • More helpful research tools like notes, citations, and highlights
  • Ad-free environment

Already a member? Log in now.

Notes for this article

Add a new note
If you are trying to select text to create highlights or citations, remember that you must now click or tap on the first word, and then click or tap on the last word.
Loading One moment ...
Project items
Notes
Cite this article

Cited article

Style
Citations are available only to our active members.
Sign up now to cite pages or passages in MLA, APA and Chicago citation styles.

Cited article

Revised OMB Circular A-123: SOX for Federal Agencies
Settings

Settings

Typeface
Text size Smaller Larger
Search within

Search within this article

Look up

Look up a word

  • Dictionary
  • Thesaurus
Please submit a word or phrase above.
Print this page

Print this page

Why can't I print more than one page at a time?

While we understand printed pages are helpful to our users, this limitation is necessary to help protect our publishers' copyrighted material and prevent its unlawful distribution. We are sorry for any inconvenience.
Full screen

matching results for page

Cited passage

Style
Citations are available only to our active members.
Sign up now to cite pages or passages in MLA, APA and Chicago citation styles.

Cited passage

Welcome to the new Questia Reader

The Questia Reader has been updated to provide you with an even better online reading experience.  It is now 100% Responsive, which means you can read our books and articles on any sized device you wish.  All of your favorite tools like notes, highlights, and citations are still here, but the way you select text has been updated to be easier to use, especially on touchscreen devices.  Here's how:

1. Click or tap the first word you want to select.
2. Click or tap the last word you want to select.

OK, got it!

Thanks for trying Questia!

Please continue trying out our research tools, but please note, full functionality is available only to our active members.

Your work will be lost once you leave this Web page.

For full access in an ad-free environment, sign up now for a FREE, 1-day trial.

Already a member? Log in now.

Are you sure you want to delete this highlight?