The Office of Management and Budget has released new rules designed to strengthen the internal control requirements over financial reporting by federal agencies.

“Internal control should be an integral part of the entire cycle of planning, budgeting, management, accounting and auditing,” wrote the OMB. “It should support the effectiveness and the integrity of every step of the process and provide continual feedback to management.”

Revised Circular No. A-123, Management’s Responsibility for Internal Control, applies to all executive agencies and corporations. The circular updates internal control standards and specifies new requirements for conducting management’s assessment of the effectiveness of internal control over financial reporting. Many of the new rules resemble those for publicly traded companies under Section 404 of the Sarbanes-Oxley Act.

The revised rules will take effect October 1, at the beginning of the 2006 fiscal year; assessments must be completed within 45 days of the end of the fiscal year.

Circular A-123, which implements the Federal Manager’s Financial Integrity Act of 1982, was last updated in 1995. It includes a new Appendix A, which prescribes a separate assurance statement on the effectiveness of the internal controls over financial reporting and applies to the 24 CFO Act agencies.

The OMB will release an implementation guide in March.

Under the updated rules, agencies and individual federal managers must take systematic and proactive measures to:

• Develop and implement appropriate, cost-effective internal control for results-oriented management;
• Assess the adequacy of internal control in federal programs and operations;
• Separately assess and document internal control over financial reporting consistent with the process defined in Appendix A;
• Identify needed improvements;
• Take corresponding corrective action;
• Report annually on internal control through management assurance statements.