Committee of Sponsoring COSO

8/6/2019 Committee of Sponsoring COSO

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y Due to questionable corporate political campaignfinance practices and foreign corrupt practices in themid -1970s, the U.S. Securities and ExchangeCommission (SEC) and the U.S. Congress enacted

campaign finance law reforms and the 1977 ForeignCorrupt Practices Act (FCPA) which criminalizedtransnational bribery and required companies toimplement internal control programs. In response, the

Treadway Commission, a private-sector initiative, wasformed in 1985 to inspect, analyze, and makerecommendations on fraudulent corporate financialreporting.


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COSO is sponsored by five U.S. professionalorganizations:-

The American Accounting Association

The American Institute of Certified PublicAccountants

Financial Executives International

The Institute of Internal Auditors

The Institute of Management Accountants.


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y Internal control is aprocess

y

Internal control is affected bypeopley Internal control can be expected to provide only

reasonable assurance, not absolute assurance

y Internal control is geared to the achievement of

objectives in one or more separate but overlappingcategories.


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y Developing, implementing, and monitoring internal

control.y Effectiveness and efficiency of operations

y Reliability of financial reporting

y Compliance with applicable laws and regulations

y Safeguard assets.


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y

In 1992, COSO published the reportInternal Control--

Integrated Frameworkas a "basis for developingbusiness control systems and assessing theireffectiveness" (Internal Control Issues). This reportprovides the following five components of internalcontrol:


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RISKS CAN GET IN THERISKS CAN GET IN THE

WAY OF OBJECTIVESWAY OF OBJECTIVES

Precondition: Establishment of ObjectivesPrecondition: Establishment of Objectives

Can Be External or InternalCan Be External or Internal

e.g. Externale.g. External -- Adoption & Safe Families ActAdoption & Safe Families Act

e.g. Internale.g. Internal -- ConnectionsConnections

Relates Risks to Achievement of ObjectivesRelates Risks to Achievement of Objectives

Determines How Risks Are to Be ManagedDetermines How Risks Are to Be Managed


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Sets the Tone of OrganizationSets the Tone of Organization

Foundation for All Other ComponentsFoundation for All Other Components

Integrity, Ethical Values & CompetenceIntegrity, Ethical Values & Competence

Management's Philosophy & OperatingManagement's Philosophy & Operating

StyleStyle

Assignment of Authority &Assignment of Authority &ResponsibilityResponsibility

Organizational StructureOrganizational Structure


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Policies & ProceduresPolicies & Procedures

Ensure Actions Are Taken to AddressEnsure Actions Are Taken to AddressRisksRisks

Include Approval, Authorization,Include Approval, Authorization,

Verification, Reconciliation,Verification, Reconciliation,

Segregation of Duties, etc.Segregation of Duties, etc.


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Must Be Timely & RelevantMust Be Timely & Relevant

Can Be Operational, Financial orCan Be Operational, Financial orComplianceCompliance--RelatedRelated

Must Cover Internal & External EventsMust Cover Internal & External Events(e.g. ASFA requirements, Marisol)(e.g. ASFA requirements, Marisol)

Must Flow Down, Across & UpMust Flow Down, Across & Up

Must Involve External PartiesMust Involve External Parties


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y

overridden by collusion among employeesy coercion by top management

y Due to involve human action increases the possibilitiesof error.

Documents

Committee of Sponsoring COSO