Page 311 - COSO Guidance Book

Internal control — Considerations for

smaller entities

Characteristics of smaller companies

What are the distinguishing features of a small company, including a small publicly held company? This
is a frequently asked question. In any effort to classify companies by size into different categories, apart
from asking how many employees there are, other characteristics to study are the entity’s revenue,
number of locations, and market area.

The 2013 Committee of Sponsoring Organizations of the Treadway Commission (COSO) Internal Control
— Integrated Framework (the framework) notes that the following criteria also might be used to
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distinguish a smaller entity:

 Fewer lines of business or fewer products within lines
 Concentration of marketing focus
 Leadership by management with significant ownership interest or rights
 Fewer levels of management with wider spans of control
 Less complex transaction-processing systems
 Employees with a wider range of duties
 Limited ability to maintain deep resources in line workers and support-staff positions
Some of these criteria that distinguish smaller companies also characterize many large publicly held
companies. For example, William Ford, Jr., is the chairman of the board of Ford Motor Company. He and
other family members have a significant ownership interest in Ford (an owner-manager involvement
typically characteristic of smaller businesses). Hence, there will always be some overlap between small
and large companies in terms of the criteria used to differentiate companies by size.

There is another criterion that can be used to distinguish smaller from larger public companies: the
degree to which an entity outsources functions. Larger companies tend to outsource more than smaller
companies.

Cost and benefit of internal control

Accounting and auditing literature has consistently addressed the principle that the cost of internal
controls should not exceed the benefits derived from implementing the control. The following example
illustrates this principle.

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Committee of Sponsoring Organizations of the Treadway Commission (COSO), Internal Control — Integrated
Framework, appendix C: “Considerations for Smaller Entities,” May 2013.

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