Ask FERF (Financial Executives Research Foundation) about...COSO resources.

• Author: Sinnett, William M.
• Position: Resources

The Securities and Exchange Commission (SEC) has responded to Section 404 of the Sarbanes-Oxley Act with proposed rule 33-8138, "Disclosure Required by Sections 404,406 and 407 of the Sarbanes-Oxley Act of 2002." This SEC proposal refers to "the COSO framework." As a result, many FEI members have asked about COSO and the COSO framework.

What is COSO?

COSO is the Committee of Sponsoring Organizations. It was formed in 1985 as an alliance of five professional organizations: The American Accounting Association (AAA), The American Institute of Certified Public Accountants (AICPA), Financial Executives International (FEI), The Institute of Internal Auditors (IIA) and The Institute of Management Accountants (IMA).

COSO was established to create a single voice in the financial community on issues related to the problem of fraudulent financial reporting. Its stated mission is: COSO is a voluntary private-sector organization dedicated to improving the quality of financial reporting through business ethics, effective internal controls and corporate governance.

FERF recently published an Issue Alert, What is COSO? Defining the Alliance That Defined Internal Control, which is available at the FERF bookstore: www.fei.org/rfbookstore/.

Fraudulent Financial Reporting

In 1985, the National Commission on Fraudulent Financial Reporting, known as the Treadway Commission, was created by the five sponsoring organizations. The Commission issued the Report of the National Commission on Fraudulent Reporting in October 1987. The report was written to study "causal factors that can lead to fraudulent financial reporting," and to identify ways to reduce its incidence. The full report is available at www.coso.org/.

Internal Control -- Integrated Framework

In 1992, COSO published Internal Control-Integrated Framework to provide a common understanding of internal control, and to assist management in exercising better control over an enterprise. This multi-volume report defines internal control as:

"A process, effected by an entity's board of directors, management and other personnel, designed to provide reasonable assurance regarding the achievement of objectives in the following categories: Effectiveness and efficiency of operations, Reliability of financial reporting, Compliance with applicable laws and regulations."

Five components of internal control were then identified:

* Control environment

* Risk assessment

* Control activities

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