COSO Committee of Sponsoring Organizations of the Treadway Commission
Committee of Sponsoring Organizations of the Treadway Commission
In 2013, the Committee of Sponsoring Organizations of the Treadway Commission (COSO) released an update to its Internal Control—Integrated Framework (Framework). The original framework, which was released in 1992, has gained broad acceptance and is widely used around the world. It is recognized as a leading framework for designing, implementing, and conducting internal control and for establishing requirements for an effective system of internal control. To help users apply the Framework to internal control over external financial reporting, COSO has released this companion publication, Internal Control over External Financial Reporting: A Compendium of Approaches and Examples (Compendium). More specifically, the Compendium provides approaches and examples to illustrate how entities may apply the principles set out in the Framework to a system of internal control over external financial reporting.
In the twenty years since the release of the original framework, business and operating environments have changed dramatically, becoming increasingly complex, technologically driven, and global. At the same time, stakeholders have become more engaged, seeking greater transparency and accountability for the integrity of systems of internal control that support business decisions and governance of the organization. The Framework and the Compendium incorporate many of these changes including:
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Expectations for Governance Oversight—Higher regulatory and stakeholder expectations require the board of directors to oversee internal control over external financial reporting. Some jurisdictions require specific regulatory requirements for expertise and independence of board members of certain types of entities.
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Globalization of Markets and Operations—Organizations expand beyond domestic markets in the pursuit of value, often entering into international markets and executing cross-border mergers and acquisitions.
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Changes and Greater Complexities in the Business—Organizations change business models and enter into complex transactions in pursuit of growth, greater quality, and productivity, and in response to changes in market and regulatory environments. These changes may include entering into strategic alliances, joint ventures, and other complex contractual arrangements with external parties, implementing shared services, and engaging outsourced service providers.
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Demands and Complexities in Laws, Rules, Regulations, and Standards—Regulators and policy makers promote greater investor protection and confidence in the financial reporting systems through changes in rules, regulations, and standards. Also, users of external financial reports seek greater amounts of information to better evaluate an entity's financial condition and operating results as businesses become more complex.
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Expectations for Competencies and Accountabilities—Demands for greater competence and accountability increase as organizations grow; acquire entities; introduce new products and services; comply with complex rules, regulations, and standards; and implement new processes and technologies. Organizations may flatten and shift management operating models and delegate greater authority or accountability to certain roles.
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Uses of, and Reliance on, Evolving Technologies—An increasingly mobile and interconnected world has made technology more essential for many organizations to improve performance, business processes, and decision making. Entities are investing in emerging technologies, such as cloud computing, mobile devices, and social media, and using enterprise resource planning (ERP) and other technologies to standardize, automate, and streamline business processes.
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Expectations Relating to Preventing or Detecting Material Omissions and Misstatements and Fraud—Stakeholders today have higher expectations for effective internal control over external financial reporting in preventing and detecting material omissions and misstatements due to error and fraud.
Each of these changes requires an organization to periodically evaluate the implications on its system of internal control over external financial reporting and to design and implement appropriate responses so that the system of internal control adapts and remains effective over time.
The Compendium provides practical approaches and examples that illustrate how the components and principles set forth in the Framework can be applied in preparing external financial statements. It neither replaces nor modifies the Framework; rather, it is a supplemental document that can be used in concert with the Framework when considering internal control over external financial reporting.
Finally, the COSO Board would like to thank PwC and the Advisory Council for their contributions in developing the Compendium. Their full consideration of input provided by many stakeholders and their attention to detail were instrumental in ensuring that the Compendium will be helpful to a variety of organizations in applying the Framework to internal control over external financial reporting.
David L. Landsittel
COSO Chair
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Copyright © 2013 – 2016 Committee of Sponsoring Organizations of the Treadway Commission and the American Accounting Association. All Rights Reserved. Use of materials is subject to COSO's Policy of Acceptable Use.
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