Articles on Internal Auditing

What is COSO: Background and Events Leading to Internal Control - Integrated Framework

Published by The Committee of Sponsoring Organizations (COSO) of The National Commission of Fraudulent Financial Reporting the (Treadway Commission)
Excerpted from: Appendix A of Internal Control - Integrated Framework (1992)

COSO is:

  • The American Institute of Certified Public Accountants
  • The American Accounting Association
  • The Institute of Internal Auditors
  • The Institute of Management Accountants
  • The Financial Executives Institute

Considerable attention has been devoted to internal control by a number of public, private and professional bodies, which have proposed or issued recommendations or requirements on the subject. This heightened activity produced a wide variety of philosophies, resulting in different views about the nature, purpose and means of achieving effective internal control.

Treadway Commission

The National Commission on Fraudulent Financial Reporting, known as the Treadway Commission, was created in 1985 by the joint sponsorship of the AICPA, American Accounting Association, FEI, IIA and Institute of Management Accountants (IMA, formerly the National Association of Accountants). The Treadway Commission had as its major objective to identify the causal factors of fraudulent financial reporting and to make recommendations to reduce its incidence. The Commission's report, (Report of the National Commission on Fraudulent Financial Reporting - National Commission on Fraudulent Financial Reporting, 1987), issued in 1987, included recommendations for management and boards of directors of public companies, the public accounting profession, the SEC and other regulatory and law enforcement bodies, and academics. The Commission made a number of recommendations that directly addressed internal control. It emphasized the importance of the control environment, codes of conduct, competent and involved audit committees and an active and objective internal audit function. lt renewed the call for management reports on the effectiveness of internal control. Additionally, the Commission called for the sponsoring organizations to work together to integrate the various internal control concepts and definitions, and to develop a common reference point. It was suggested that this guidance would help public companies improve their internal control systems, and help judge their effectiveness.

Based on this recommendation, a task force under the auspices of the Committee of Sponsoring Organizations of the Treadway Commission conducted a review of internal control literature. The results, published by the IMA, recommended that the sponsoring organizations undertake a project to provide practical, broadly accepted criteria for establishing internal control and evaluating its effectiveness. The task force recommended that the criteria be directed toward the needs of management, since management has the primary responsibility for establishing, monitoring, evaluating and reporting on internal control. However, it suggested that the criteria should be developed through a process that would result in their acceptance by other groups having a significant interest in internal control, including internal and external auditors, educators and regulatory bodies. Internal Control - Integrated Framework is a result of that recommendation.

Control - Integrated Framework

An array of concepts and views of internal control has developed over the years, expressed in proposed legislation, regulation, professional standards and guidelines, public and private reports, and a substantial and diverse body of academic literature. The scope of these writings is as broad as the wide variety of purposes internal control can serve and the many perspectives from which it can be viewed. They contain different definitions of internal control, disparate views on the role of internal control in an entity and how it should be established, and varying opinions on how internal control effectiveness should be determined.

The expanded focus of both the public and private sectors on internal control has increased the sensitivity of corporate management, internal and independent auditors, legislators, regulators, academics and the general public to the need for effective internal control to manage and control an entity's activities. The COSO study and the resulting report (Internal Control - Integrated Framework) was initiated to provide a common understanding of internal control among all parties and to assist management to exercise better control over an enterprise.

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