Question

What is the opinion based on the Treadway Commission? (See paragraphs below) Please raise thoughtful questions, analyzing relevant issues, building on ideas, synthesize across readings and discussions, expand the class perspective, and appropriately challenge assumptions and perspectives.

The Treadway Commission is an important entity in the history of performance and internal auditing because it helped "define internal controls in terms of achieving three major objectives: effectiveness and efficiency of operations, compliance with laws and regulations, and reliability of financial reporting." (Ives, Hancox, 2014).

The Treadway Commission was responsible for the Committee of Sponsoring Organizations (COSO Report) that helped define the ground rules for what should be covered in an audit. They set up the five elements of an internal control. The control environment, risk factors, control activities, a system for monitoring internal controls and performances, and having an information system.

The five elements were established to help make fraudulent behavior and waste more difficult endeavors. The goal was to establish internal controls to help management and to create environment that deters bad behaviour and increase performance in the processes. The control environment is a tone that management sets in order to let employees and contractors know that internal control is a priority for the organization. The factors also help determine risk factors and how to mitigate them. Thirdly they put in place control activities, such as checks and balances to ensure that no one person has complete control over a critical process. There also needs to be a system to monitor the internal controls to make sure they are working properly and to help auditors to audit the controls. The last item is having some system in place to store and organize data, and make it easier to access information both by managers and auditors.

These are all important aspects to the performance audit and internal control worlds, both publicly and in governmental entities.

Answer 1

Introduction

Treadway Commission was as set up as a private sector initiative to respond to increasing corporate frauds and malpractices in financial reporting. The main objectives of the commission was to analyze, respond and recommend best practices to counter and discourage fraudulent practices. COSO in 1992 came up with a framework of internal control. This framework is widely recognized across organization and is used as a measure of effectiveness of internal control. The existence and implementation of appropriate internal controls is imperative in an organization since these become the basis of the output in terms of the financial statements. An apt internal control system provides reasonable assurance to the auditors and the users that the financials depicted can be relied upon for taking decisions.

COSO Internal Control framework

COSO defines effective internal control system as a framework which has five components and that helps in addressing the risk of corporate fraud:

1. Control Environment – It represents the set of processes that help in establishing internal controls across the organization. Through this setup, the CXOs try and set up a context as to how significant existence and application of internal controls are in an entity. Internal controls are to be imbibed at the root of the organization which means it cannot be just a process but ways of working to be embraced by all resources.
2. Risk Assessment – It refers to a continuous process of identifying and assessing all types of risk, be it internal or external.
3. Control Activities – These are the actions that help CXOs mitigate the identified risk and finally achieve end objectives.
4. Communication - It refers to continuous flow of information internally within the organization as well as external communication. Through the internal communication management can help understand personnel the significance of a well-functioning internal control system.
5. Monitoring Activities – Evaluations build within processes at different levels help assess whether all components are functioning properly or not. The outcomes are measured against set standards and criteria established by Management.

Conclusion

The perspective that all is well within an organization without having evaluated its internal control systems is very dangerous. COSO provides a set of principles which can be used as broad guidelines to build processes and systems that provide reasonable assurance to both outside world and within the organization that ‘all is well’. The reason why COSO is far more popular than any other framework is because it is easy to understand and it recommends of principles and not rules. Principles act as guidelines that help management in thinking and implementing in the right direction while rules are rigid. Importance of embracing a culture that is aware of the importance of internal controls within an entity, its personnel cannot be given more emphasis since along with processes and policies it is the mindset of its people that determine the ways of working of any business.