...Development of COSO Frameworks and Guidance Yongheng Wang Kellstadt Graduate School of Business, DePaul University Abstract Fraudulent financial reporting has always been a crucial issue in business operation. Sometimes companies could report fraudulent financial statements to conceal true information and benefit from questionable transactions. Investors and shareholders would not be able to obtain useful information to make business decisions if financial information failed to reflect business operation and the company’s financial status. Broadly, the market would hurt due to the negative impact on the market efficiency. As a result, COSO, the Committee of Sponsoring Organizations of the Treadway Commission, was formed in 1985. It has published several comprehensive frameworks to help organizations to improve business operation and governance and to avoid fraud. The aim of this report was to study the development of COSO, including its history and main frameworks and guidance regarding internal control, enterprise risk management and fraud deterrence. The report interpreted the three areas under COSO framework with their key compositions and most recent updates. After the detailed interpretation, conclusion and recommendations were given. Keywords: Fraudulent Financial Reporting, COSO, Internal Control, ERM, Fraud Introduction and Background Financial information is a significant and unique composition of the world of business. Analysis on financial information...
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...ORGANIZATIONS OF THE TREADWAY COMMISSION (COSO) Introduction The Committee of Sponsoring Organizations of the Treadway Commission was organized in 1985 and was jointly sponsored by five professional organizations, American Accounting Association (AAA), American Institute of CPA (AICPA), the Institute of Internal Auditors (IIA) , the Association of Accountants and Financial Professionals in Business (IMA), and Financial Executives International (FEI). Each sponsoring organization appoints representatives to periodically work together on specific projects. The goal of COSO is to provide leadership through the development of frameworks and guidance on enterprise risk management, internal control and fraud deterrence to enhance organizational governance and decrease fraud 1. The History of COSO and the Creation of the COSO Framework Due to the public criticisms against both accounting professionals and the U.S. Securities and Exchange Commission (SEC), the Treadway Commission was formed in 1985 to inspect fraudulent financial statements, especially in the aspects of reliability and accuracy. In 1987, the Treadway Commission issued its first report on fraudulent financial reporting. COSO was created because of this report. In 1992, COSO released the report titled Internal Control-Integrated Framework, which defined the concept of internal control and established a framework on how to make internal control systems work effectively. The 1992 COSO framework contains the following...
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...Sarbanes-Oxley Act of 2002 Following a number of discovered fraud scandals committed by well-known corporations and in order to restore public confidence in the stock market and trading of securities, the United States congress passed the Sarbanes-Oxley Act in the year 2002. As a result of the act endorsement by the New York Stock Exchange and the Securities and Exchange Commission, among many other national overseeing committees, a number of rules and regulations were proposed and adopted and that demanded new processes and programs be instilled for ensuring compliance with the requirements of the new law. The new rules and regulations pertaining to the enacted law have a common goal: 1. Pass accountability and responsibility of the accuracy and truthfulness of financial statements directly to the executives and board members of a company or corporation 2. Increase transparency of corporate accounting and performance record reporting 3. Business reporting ethics to be emphasized with in-place steps and procedures adopted to detect and prevent any type of fraud or manipulation of stakeholders for private benefit. Traditionally, preparation of a company’s financial statements including day-to-day management of the company has been the responsibility of the board of directors and upper management team of the company. The new law clearly rests the responsibility for accuracy and truthfulness of the published financial records on the shoulders of the responsible directors who...
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...We will identify the internal control risks within Apollo Shoes as well as a description of the relationship between internal controls and the audit process, and a brief synopsis of our responsibility in detecting and reporting fraud. Guidelines According to COSO “Internal control is broadly defined 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.” “While internal control is a process, its effectiveness is a state or condition of the process at one or more points in time.” The Sarbanes-Oxley Section 404 Act, requires management to produce an “internal control report” along with the annual Exchange Act report. This report is required to confirm “the responsibility of management for establishing and maintaining an adequate internal control structure and procedures for financial reporting.” The report must also “contain an assessment, as of the end of the most recent fiscal year of the Company, of the effectiveness of the internal control structure and procedures of the issuer for financial reporting.” To successfully complete this management generally adopts an internal control framework such as that described in COSO. According to COSO here are the guidelines for the framework. • Assess both the design and operating effectiveness of selected internal controls related to significant accounts and relevant assertions, in the context of material misstatement...
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...Responsibility with Sarbanes-Oxley Act and COSO Enron, Arthur Andersen, WorldCom. What does these companies and others have in common? They involved audit and corporate governance failures, resulting in the erosion of public confidence. Because of these high-profile corporate and accounting scandals, Congress passed the Public Company Accounting Reform and Investor Protection Act, commonly known as the Sarbanes Oxley Act of 2002 (SOX). SOX mandated reforms to improve financial disclosures from corporations and to prevent accounting fraud. I. SOX SOX applies to all public companies in the United States and international companies that have registered equity or debt securities under the Securities Exchange Act of 1934. It is also applicable to accounting firms that provide auditing services to these companies subject to the Act. Its purpose is to enhance corporate accountability and responsibility. The Eleven Titles There are eleven titles in SOX. Title I addresses public company accounting oversight board. Title II addresses an auditor’s independence. Title III addresses corporate responsibility. Title IV address enhanced financial disclosures. Title V addresses analyst conflicts of interest. Title VI addresses commission resources and authority. Title VII addresses studies and reports regarding consolidation, credit rating, violations, enforcement and investment banks. Title VIII addresses corporate and criminal fraud accountability. Title IX addresses white-collar...
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...ACCT 3222 Sec. 01 October 18, 2011 The COSO Framework Due to questionable corporate political campaign finance practices and foreign corrupt practices in the mid -1970s, the U.S. Securities and Exchange Commission (SEC) and the U.S. Congress enacted campaign finance law reforms and the 1977 Foreign Corrupt Practices Act (FCPA) which criminalized transnational bribery and required companies to implement internal control programs. In response, the Treadway Commission, a private-sector initiative, was formed in 1985 to inspect, analyze, and make recommendations on fraudulent corporate financial reporting. The Treadway Commission studied the financial information reporting system over the period from October 1985 to September 1987 and issued a report of findings and recommendations in October 1987, Report of the National Commission on Fraudulent Financial Reporting. As a result of this initial report, the Committee of Sponsoring Organizations (COSO) was formed and it retained Coopers & Lybrand, a major CPA firm, to study the issues and author a report regarding an integrated framework of internal control. In September 1992, the four volume report entitled Internal Control— Integrated Framework was released by COSO and later re-published with minor amendments in 1994. This report presented a common definition of internal control and provided a framework against which internal control systems may be assessed and improved. This report is one standard that U.S. companies use...
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...practices. The resultant regulatory intervention forces a company to revisit its internal control structures and asses the nature and scope of its compliance with the law. This paper reviews the implications emerging from the mandatory compliance with Sarbanes-Oxley (SOX) Act. Issues related to IT governance and the general integrity of the enterprise are also identified and discussed. Industry internal control assessment frameworks, such as COSO and COBIT, are reviewed and their usefulness in ensuring compliance evaluated. 1. Introduction Accounting scandals at some of the big corporations like Enron, HealthSouth, Tyco and WorldCom had a devastating impact on investor confidence. Clearly, it was possible to engage in frauds of such magnitude because of the inability of auditors to detect early signs of such possibilities. This paper reviews the impact of legal controls on Information Technology (IT) governance practices, especially in the case of SOX Act. The resultant crisis in the financial markets and massive media coverage of the frauds created a situation where...
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...customer check endorsement - Valuation F. Unable to edit and apply discounts and correct net amount - Valuation Purchases and Accounts Payable: Weakness G. Need approval for the prepared voucher for proper -Valuation Account distribution Strengths H. Verifies details on goods received with the receiving report I. Matching control tape with purchase summary for the processed invoices Payment Processing Flowchart: Strengths J. Matching the checks with the documents, amount and remittance details K. Checks are reviewed before signing for approval. L. Cancelled checks/documents to avoid duplication. M. Mailed check directly to vendors after signing the checks. Biltrite’s strengths and weaknesses in the internal control Assertion Payroll Processing Flowchart: Weakness N. Supervisor approves employee’s time cards weekly -Occurrence Strengths O. Payroll department reconciles time cards total hours paid with payroll summary report. P. Good control in input editing for validity of employees information and worked hours. Q. Treasurer reviews checks with payroll summary report before signing and distributing checks. Other Accounting...
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...The Committee of Sponsoring Organizations of the Treadway Commission (COSO) is a joint initiative of five private sector organizations dedicated to providing thought leadership to executive management and governance entities on critical aspects of organizational governance, business ethics, internal control, enterprise risk management, fraud, and financial reporting. COSO has established a common internal control model against which companies and organizations may assess their control systems. The COSO framework 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. * Safeguarding of Assets (MHA) The COSO framework involves several key concepts: * Internal control is a process. * Internal control is affected by people. * Internal control can be expected to provide only reasonable assurance, not absolute assurance, to an entity's management and board. * Internal control is geared to the achievement of objectives in one or more separate but overlapping categories. COSO internal control framework consists of five interrelated components derived from the way management runs a business. These components provide an effective framework for describing...
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...Corporation Part A The overall control environment at Koss Corporation in the years leading up to the fraud was inadequate. The structure of the Board of Directors was poor and the management did not place enough importance on financial reporting. These reasons allowed Ms. Sujata Sachdeva easily make unauthorized wire transfers, without being caught by either the management or the auditors – the people responsible for detecting fraud. The poor structure of the Board of Directors was one of the main reasons that the unauthorized transactions went unnoticed. First, there was only one person managing and assessing the internal control system. According to the Sarbanes-Oxley Act (SOX), non-accelerated filers require the CEO and CFO to separately perform an assessment on the internal controls over financial reporting (ICFR). However, in the case of Koss Corporation, both the CEO and CFO were the same person – Michael Koss. Therefore if he implemented a defective the internal control system, there was nobody there to correct him. Furthermore, the company’s auditor, Grant Thornton, was not required to, nor did they assess the effectiveness of the ICFR. They simply designed their audit of financial statements based on the manager’s report of the ICFR. Consequently, if Michael Koss incorrectly told Grant Thornton that the company had an effective ICFR, Grant Thornton probably designed a financial statement audit with little skepticism. Another problem with the structure of the Board of Directors...
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...Running head: CORPORATE COMPLIANCE REPORT Corporate Compliance Report Corporate Compliance Report With so many corporate scandals and misappropriation of finances, the United States government has developed many laws and action agencies to aid in reducing the amount of corporate mishandlings. Regulatory legislation mandating a report on internal controls is now a corporate obligation. Risk management is a fundamental area of importance to stakeholders. Organizations that are best practice companies look to the Committee of Sponsoring Organizations for guidance to develop efficient internal controls, enterprise risk and against fraudulent activities. This paper will outline a plan to implement enterprise risk for an organization of choice. The Committee of Sponsoring Organizations of the Treadway Commission (COSO) “is dedicated to guiding executive management and governance entities toward the establishment of effective, efficient, and ethical business operations on a global basis. It sponsors and disseminates frameworks and guidance based on in-depth research, analysis, and best practices” (COSO, 2006). COSO is a private-sector program funded and sponsored by five professional organizations. The Committee conducted an 11-year research study to analyze instances of fraudulent financial reporting and determine contributing factors that lead to financial statement fraud (COSO, 2006). COSO’s research demonstrated that most fraudulent behavior involved the chief...
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...taught that internal control for smaller entities was an oxymoron. My supervisors made it clear that, because segregation of incompatible duties was not usually possible for smaller entities, internal control was non-existent. In 2006, COSO changed the rules by publishing Internal Control over Financial Reporting — Guidance for Smaller Public Companies and recognizing there are different rules for larger and smaller entities. Essentially, COSO said internal controls for smaller entities are more likely to be informal and carried out by one or a few persons. COSO’s guidance, audit standards from the PCAOB and AICPA attestation standards all require a top-down approach whenever considering internal controls. One or a few management persons performing control procedures (top-down) can produce a good internal control system for a smaller entity! Control procedures consist of entity-level and activity-level controls. For smaller entities, public or non-public, the design of control procedures should focus primarily on the entity-level (top-down) since the activity-level controls may be ineffective due to a lack of segregation of duties. Entity-level controls are the key controls for smaller entities and are the most effective for preventing errors or fraud from occurring and going undetected. If entity-level controls are properly designed, and if they are diligently performed by management and/or persons charged with governance, a small entity can have a good internal control system. This...
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...in that movement and has impacted many public companies. SOX requires public companies registered with the Securities Exchange Commission to evaluate the effectiveness of its internal control over financial reporting and disclose this information in its financial statements. For instance, Dell Inc., a large multinational IT corporation, was one of the many large corporations affected by the implications of SOX. First, Section 404 of SOX requires Dell’s management, under the supervision of the CEO and CFO, to establish and maintain adequate internal control in accordance with the rules defined in the Securities Exchange Act. In addition to establishing the controls, they are also required to evaluate the effectiveness of the controls against the criteria established in the Internal Control-Integrated Framework issued by COSO. Second, Section 409 of SOX requires management to disclose material changes in internal control, and the results or potential effects of those changes. Finally, Section 404 of SOX requires Dell’s auditing firm to evaluate management’s assessment of Dell’s internal control and to issue an opinion on the quality and accuracy of the assessment. All in all, SOX raised corporate responsibility to assess and improve internal control over financial reporting. It also...
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...EFFECTIVENESS OF INTERNAL CONTROLS IN THE FORESTRY COMMISSION OF GHANA A CASE STUDY ATEBUBU FOREST DISTRICT. A THESIS SUBMITTED TO THE DEPARTMENT OF ACCOUNTING AND FINANCE, IN PARTIAL FULFILLMENT OF THE REQUIREMENTS FOR THE AWARDS OF MASTERS IN BUSINESS ADMINISTRATION. (FINANCE OPTION) KWAME NKRUMAH UNIVERSITY OF SCIENCE AND TECHNOLOGY, KUMASI GHANA SCHOOL OF BUSINESS COLLEGE OF ART AND SOCIAL SCIENCE BY PRINCE KWAKU ASARE PG8365312 JULY, 2014 DECLARATION I hereby declare that this submission is my own work towards the award of Masters in Business Administration Accounting option and no part of it has been presented for another degree in this university or elsewhere expect where due acknowledgement has been made in the test. PRINCE KWAKU ASARE ………………….…… ………………….. (CANDIDATE PG 8365312) SIGNATURE DATE Certified by: MR MICHAEL ADUSEI …………………… …………………… (SUPERVISOR) SIGNATURE DATE Certified by: ………………………..…. ……………………… …………………….. HEAD OF DEPARTMENT SIGNATURE DATE DEDICATION This work is dedicated to the almighty God for his guidance and protection throughout the undertaken of this thesis. I also dedicated this work to my late Dad Emmanuel Gyimah,my late Mum Comfort Adwoa Frimah, my late Uncle Kofi Anane and my bossom friend Joseph...
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...Pros of Sarbanes Oxley Act of 2002 1) Protection of whistleblowers * Section 806 attempts to encourage and protect whistleblowers by providing for anonymous whistleblowing, establishing criminal penalties for retaliation against whistle blowing, and clearly defining whistleblowing channels. * The rule states that a company cannot “discharge, demote, suspend, threaten, harass, or in any manner discriminate” against a whistleblower. * Any retaliation against a whistleblower can result in significant fines and/or a prison sentence of up to ten years and the whistleblower can bring a civil suit against the company. * This section of the act not only covers current employees but also covers applicants and former employees of that company. * This rule applies not only to publicly traded companies but also private companies, contractors, subcontractors, and agents of those companies. 2) Auditor Independence * The SEC issued final rules that amen its auditor independence rules as required by Section 208 of SOX. These rules include the following: * Non-audit services- this rule says that the accounting firm doing the auditing of a company cannot also do other types of accounting services including bookkeeping, internal audit outsourcing services, legal services, and many more non auditing services. * Audit committee pre-approvals- requires that an issuer’s audit committee pre-approve all audit and no audit services provided by its auditor....
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