Integrating concepts of internal control.

The members of the Advisory Council for the newly released exposure draft, "Internal Control: Integrated Framework," discuss why the project is important to them, to their professions, and to their companies.

Help is on the way for companies wanting to evaluate and improve their internal control systems. Earlier this month, the committee of organizations sponsoring the Treadway Commission (the National Commission on Fraudulent Financial Reporting) released an exposure draft reporting the findings of a year-and-a-half-long study on internal controls.

The project actually dates back to 1987, when the Treadway Commission requested that its sponsoring organizations-the American Accounting Association, American Institute of Certified Public Accountants, Financial Executives Institute, Institute of Internal Auditors, and National Association of Accountants-work together to integrate the many concepts of internal control used in accounting literature and in practice, and to develop a framework to help companies improve their internal control systems.

In 1989, the Committee of Sponsoring Organizations (COSO) charged Financial Executives Research Foundation with the responsibility for conducting a study that would meet the Treadway Commission's recommendations. FERF engaged Coopers & Lybrand to perform the study. In recognition of the importance of the project and of the need to assure application of the framework throughout the entire business community, COSO decided to submit the final report to a three-month exposure process.

To learn more about the project and what COSO expects the exposure draft to accomplish, Financial Executive spoke with those who know it best-the members of the project's Advisory Council, who represent the five sponsoring organizations.

We began by asking the corporate members of the Advisory Council what are the most important objectives of their companies' internal control systems. They agreed on some basic points: that internal control systems, in the words of John Stewart, "provide reasonable assurance that transactions are executed in accordance with management's authorization and objectives, and that they are appropriately recorded for preparation of financial statements in conformity with generally accepted accounting principles." Stewart went on to say that, "Explicit in IBM's objectives is the commitment to conduct our business in conformity with relevant laws and regulations and with principles of ethical conduct."

Roger Carolus puts a somewhat different emphasis on how his company views its internal control systems: "Our objectives are to make certain that the company's resources, including its people and reputation, are adequately protected; that employees' actions are in compliance with company policies, plans, systems, and standards, and the laws and regulations of the land; that financial, operating, and managerial information is accurate, reliable, and timely; that company resources are acquired economically and used profitably and cost-effectively; and that our organizational goals and objectives are achieved."

Gaylen Larson points out the primary objective of internal controls in his company, which has a "complex, decentralized organizational structure tied together by strong centralized accountability and control processes," is to make certain that operating controls are efficient and effective. "Our ongoing reviews of control processes are custom-tailored to each...