Pascal Levensohn interviews Leinani Nakamura and Kathy Hunter, who are both professionals at the accounting firm of Mohler, Nixon & Williams. They discuss the need for effective internal controls inside emerging venture companies and why all VC company directors need to consider having proper diagnostic processes in place. The podcast concludes with comments on the PCAOB’s forthcoming revisions to Sarbanes Oxley’s Section 404 reporting standards.
Some excerpts from the podcast:
Q (Pascal): Why are internal controls so important today?
A (Leinani): Internal controls have always been important. Let’s remember that internal control is not a new concept – it’s been around for a while. COSO issued its integrated framework in 1992 and that is the framework used by most companies today. I think many companies forgot the importance of strong internal controls, and the Sarbanes-Oxley Act of 2002 re-focused public companies on the importance of strong internal controls.
Q: Why is this relevant to private companies?
A: The fundamental concepts surrounding effective internal controls are the same for small companies and large companies. The framework, or components of an effective system of internal controls – the control environment, risk assessment, control activities, information and communication, and monitoring – are the same regardless of a company’s stage of development. But how each company achieves effectiveness will look different based on its size and complexity, and will change over time as a company changes.
Q: How does the Board fit into the Company’s internal controls?
A: The Board is a very important component of the Company’s internal controls. It is part of the control environment, and to that end, sets the “tone at the top” and ethical environment of the Company. It is also part of the monitoring component – Board responsibilities typically include monitoring the internal controls systems put in place by management.
Q: The duty of oversight is a critical fiduciary duty of directors, and it appears that the process area you are talking about falls squarely under the purview of the audit committee. But I can already hear early stage companies screaming about how they can’t afford the burden of good internal controls…
To listen to the podcast go to VC-InsideOut
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