Treadway Commission’s Origin, History, and Purpose
As a voluntary service, the Committee of Sponsoring Organizations of the Treadway Commission (COSO) began in 1985. The COSO was founded and originated in order to identify factors of fraudulent financial reporting and to establish delineated internal control criteria that entities can follow (Bitpipe.com, 2007). The overall intent of COSO is to provide the financial sector of any business with a commonality of meeting objectives in operating under adequate and competent conditions, producing trustworthy financial reports, and abiding by laws and regulations (COSO, 2005).
Five Components of Internal Control: Defined and Discussed
The five components of internal control, according to the Treadway Commission is control environment, risk assessment, control activities, information and communications. The control environment is that upper management will sent appropriate messages down the line to all employees that will impact others positively, thus setting the tone for a unified controlled environment (HRMSI, 2006). This means that senior management should set a precedence and example of internal controls from above. In other words, lead by example.
Risk assessment is defined as a business that is cognizant and confronts risks (HRMSI, 2006). This means that when company conducts a risk assessment they are aware of risks and could then set objectives that allow the company to perform tasks in unison. This will mean that the risks need to be managed.
Control activities are control policies and procedures that are established and dispatched from top level management to departmental levels with the assurance that risks are recognized and managed carried out adequately (HRMSI, 2006). A company will need to implement policies and procedures that establish internal controls that include a separation of duties and then ensure that these are followed effectively.
Information and communications include encompassing control activities through information and communications that allow the passing of information to be conducted but yet controlled during the operational process (HRMSI, 2006). In this instance, one would need to offer tools to their employees. Management cannot expect their employee to integrate internal controls if they are not able to perform their duties under such internal controls.
Monitoring is that “the entire control process must be monitored, and modifications made as necessary” (HRMSI, 2006). A control process cannot be implemented and then never revisited. They must continually examine the processes and make sure that the processes are working. If they the processes are not working then changes would be necessary to satisfy any flaws.
Relationships with an Entity
Each of these components is interrelated. If one component is weak the other components are influenced and functionality is lost. A business would need to have a vision in the financial department that reflects strong integration of each of these components from the top level down. It is up to top management to place policies and procedures in place and then lead by example while they are continually monitored.
A starting point would be to evaluate the existing internal controls along with the existing strength of knowledge of laws and regulations. Once the evaluation is completed, management should see which areas are either strong or weak and make sure that the aforementioned controls are put to function. Once the new policies and procedures for a company are documented and put to practice, they will then need to evaluate and monitor how the processes are working. At that point, they will need to restructure the process if need be and continue to strive to maintain strong internal controls.
References:
Bitpipe.com, (2007). COSO. Retrieved September 20, 2007 from: http://www.bitpipe.com/tlist/COSO.html
COSO, (2005). COSO definition of internal control. COSO The Committee of Sponsoring Organizations of the Treadway Commission. Retrieved September 20, 2007 from: http://www.coso.org/key.htm
HRMSI, (2006). COSO Treadway Commission. HRMSI. Retrieved September 20, 2007 from: http://www.riskinc.net/coso-treadway.php
