Coso Issues Updated Internal Control-Integrated Framework

7/27/2019 Coso Issues Updated Internal Control-Integrated Framework

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SEC ACCOUNTING AND AUDITING BRIEF

COSO ISSUES UPDATED INTERNAL CONTROL-INTEGRATED

FRAMEWORK

Background

Section 404 of the Sarbanes-Oxley Act of 2002 (SOX) mandates that all publicly-

registered companies must include with their audited annual financial statements a

management report on the effectiveness of internal controls. Further, if a company

is not a “smaller reporting company” it also must have its auditors provide an

opinion on internal controls.

When reporting on the effectiveness of internal controls, a public company must

disclose the “framework” on which it assesses that effectiveness. Most companies

use the framework promulgated by the Committee of Sponsoring Organizations of

the Treadway Commission (COSO).

Updated COSO Framework

On May 14, 2013, the Committee of Sponsoring Organizations of the Treadway

Commission (COSO) published an update to its 1992 Internal Control–Integrated

Framework (original framework) and related illustrative documents. The goals of

the update include:

• Clarification of the requirements of effective internal control;

• Update of the context for applying internal control to many changes in

business and operating environments; and

• Broadening its application by expanding the operations and reporting

objectives

Beginning with year-ends after December 15, 2014, the updated framework must be

used. In this connection, COSO recommends that all organizations currently using

the original framework should begin to align existing practices and related

documentation to the updated framework as soon as feasible. In the meantime, the

original framework can continue to be used during the transition, but the company

must clearly disclose whether it utilized the original framework or the updated

framework in its report on internal control.

The updated framework formalizes the fundamental concepts introduced in the

original framework into 17 principles associated with the five components of

internal control:

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212.286.2600

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914.381.8900

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860.257.1870



Control Environment

1) The organization demonstrates a commitment to integrity and ethical

values.

2) The board of directors demonstrates independence from management

and exercises oversight of the development and performance of

internal control.3) Management establishes, with board oversight, structures, reporting

lines, and appropriate authorities and responsibilities in the pursuit of

objectives.

4) The organization demonstrates a commitment to attract, develop, and

retain competent individuals in alignment with objectives.

5) The organization holds individuals accountable for their internal control

responsibilities in pursuit of objectives.

Risk Assessment

6)

The organization specifies objectives with sufficient clarity to enable the

identification and assessment of risks relating to objectives.

7) The organization identifies risks to the achievement of its objectives

across the entity and analyzes risks as a basis for determining how the

risks should be managed.

8) The organization considers the potential for fraud in assessing risks to

the achievement of objectives.

9) The organization identifies and assesses changes that could significantly

impact the system of internal control.

Control Activities

10) The organization selects and develops control activities that contribute

to the mitigation of risks to the achievement of objectives to acceptable

levels.

11) The organization selects and develops general control activities over

technology to support the achievement of objectives.

12) The organization deploys control activities through policies that

establish what is expected and procedures that put policies into action.

Information and Communication

13) The organization obtains or generates and uses relevant, quality

information to support the functioning of internal control.

14) The organization internally communicates information, including

objectives and responsibilities for internal control, necessary to support

the functioning of internal control.

15) The organization communicates with external parties regarding matters

affecting the functioning of internal control.



Monitoring Activities

16) The organization selects, develops, and performs ongoing and/or

separate evaluations to ascertain whether the components of internal

control are present and functioning.

17) The organization evaluates and communicates internal control

deficiencies in a timely manner to those parties responsible for takingcorrective action, including senior management and the board of

directors, as appropriate.

For public companies that currently apply the original framework for compliance

with Section 404 (a) or (b) of SOX, COSO has indicated that the updated framework

is not expected to fundamentally change an entity’s internal control over financial

reporting or related assessment process.

COSO recommends that senior management discuss with the board of directors its

plan to adopt the updated framework as soon as practical. The board of directors

should oversee management’s assessment of any implications of applying the

updated framework as well as its determination of appropriate actions. The original

framework will be considered to be superseded as of December 15, 2014.

Further information is available on the COSO website at www.coso.org.

A complimentary Executive Summary can be downloaded here.

Please feel free to contact your PKF O’Connor Davies team if you have any questions

or concerns.

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firm that has a long history of serving domestic and international clients and providing specialized professional

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http://www.coso.org/



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Coso Issues Updated Internal Control-Integrated Framework

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