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A report of the Committee of Sponsoring Organizations of the Treadway commission (COSO), released in September 1992, is expected to have far-reaching effects on the financial community. Already called a landmark study, Internal Control--Integrated Framework establishes for the first time a standard for evaluating the effectiveness of internal control systems.
Here's a look at the framework and its implications.
WHY WAS THE FRAMEWORK DEVELOPED?
The simple answer to this question is that everyone seemed to have a different mindset regarding what internal control is all about. Since the words "internal control" and its variations have been used to mean fundamentally different things, miscommunication and vastly different expectations of internal control systems among various parties have been rampant.
The problem, when contained within the business community, is serious enough. But when laws and regulations establish requirements based on misunderstood terms and concepts, the problem's scope and impact expand dramatically.
The study was an outgrowth of a recommendation of the National Commission on Fraudulent Financial Reporting, commonly referred to as the Treadway commission. The commission called on its five sponsoring organizations to come together to integrate the various internal control concepts and provide a common reference point.
The objective was not only a conceptual framework but also a standard against which companies could assess their internal control systems and judge their effectiveness. In other words, the study was to provide both a common language and understanding and a practical way for companies to assess and improve their control systems.
THE DEVELOPMENT PROCESS
The five organizations that established and funded the Treadway commission (the American Institute of CPAs, the Institute of Internal Auditors, the Financial Executives Institute, the Institute of Management Accountants and the American Accounting Association) formed COSO. After obtaining a consensus on the need for and scope of the project, COSO established an advisory council made up of senior executives from the corporate financial community, internal and external auditing and academe.
Coopers & Lybrand was commissioned to conduct the study and prepare the report under the oversight and with the guidance of the advisory council and COSO. (The Financial Executives Research Foundation also was involved initially, providing funding and coordination.)
One might have thought, and some participants in fact did think, that bringing together largely existing...