COSO REPORT: WHAT IS IT, COMPONENTS, ADVANTAGES, DISADVANTAGES - DUDAS - 2025

The COSO (Committee of Sponsoring Organizations of the Treadway) report is a study carried out in an integrated and objective manner in the United States with the aim of establishing an internal control system. This allows for a broader field of application with greater coverage in the context of internal control.

Since the COSO report was published, it has been widely accepted worldwide and has been used as a reference pillar when determining an internal control system.

The main function of the COSO report is to establish internal control that is conducive to the development of the business environment. Source: pixabay.com

This general acceptance is due to the fact that the COSO has all the necessary phases to adequately support internal control, as long as it is implemented properly.

There are currently two versions of the COSO report: the first was published in 1992 and the second was published in 2004. The most important version is the first because it forms the basis of the entire system; in fact, the 2004 version only established some variants with respect to the 1992 version.

It is worth noting that this report is not only in charge of internal control, but also develops other related topics such as business risk management (ERM) and fraud deterrence.

Sources and important data of the COSO report

The COSO was founded in 1985 and emerged as a remedy for faulty business practices and years of crisis.

Consequently, the COSO is dedicated to studying those factors that yield suspicious or fraudulent financial information. It also produces recommendations and texts for organizations and other regulatory entities.

It can also be defined as a voluntary commission that is made up of a group of representatives from five organizations from the private sector in the United States, whose objective is to promote intellectual leadership in the face of internal control variants.

The organizations participating in COSO are the following:

- AAA (American Accounting Association).

- AICIPA (American Institute of Certified Public Accountants).

- FEI (International Finance Executive) and IIA (Institute of Internal Auditors).

- AMI (Institute of Administrative Accountants).

What is it for?

In general terms, the main objective of the COSO report is to prevent and stop internal fraud within any type of public and private company.

Likewise, the COSO is specially designed to identify those elements or events that may affect the business entity. It is also in charge of managing risk factors and providing a certain level of security within the administration and the board of directors that is focused on meeting the objectives of the company.

According to the text of the report, the COSO can summarize its tasks in three main premises:

- Efficiency and effectiveness within commercial operations.

- Reliability and neatness of financial information.

- Compliance with applicable regulations and laws.

Components

In his article Internal control and its five components according to the COSO report, Javier Romero establishes that there are five main components of internal control that derive from the administrative processes of each company. These are the following:

- Control environment.

- Control activities.

- Risks evaluation.

- Supervision and monitoring.

- Information and communication.

Regarding internal control, it is necessary to establish that it is a multidirectional, permanent and repetitive process in which one component influences the others. This dynamics allows the formation of an integrated system that reacts dynamically to equally changing conditions.

Advantage

The COSO report has the following benefits:

- It allows the management of the companies to have a global vision of the possible risks, in turn facilitating the correct actions for the management plans.

- It makes it possible to know the priority of the objectives together with the fundamental risks of the business and the controls that were implemented. Thanks to this, companies can properly manage their administration.

- It allows making a more adequate and secure decision-making, facilitating capital income.

- Facilitates the alignment of group objectives with the objectives belonging to each of the business units.

- It allows to provide support within the activities of internal control and strategic planning.

- Facilitates compliance with regulatory frameworks and the practical demands of corporate governments.

- Promotes the idea that risk management becomes a fundamental pillar within the group culture of the company.

Disadvantages

When referring to the COSO report, one should not speak of disadvantages, but rather of the limitations that revolve around internal control. Consequently, these limitations refer to those events that cannot be controlled through internal audit.

As mentioned in previous paragraphs, the objective of internal control is to protect the assets of the company; However, this factor may be subject to a series of limitations that affect its performance to some extent. These limitations can be the following:

- According to the COSO, internal control should not cost more than what it receives through its benefits; This means that the cost-benefit records are necessarily reviewed.

- The COCO report establishes that internal control is only directed at routine matters, so it is not adapted to global situations.

- Although internal control was established in companies with the aim of obtaining optimal results, it is mediated by the attitude of its employees, so it does not resist the absence of moral and ethical principles when a third party executes a theft or fraud.

- When not properly applied, internal control can be affected by abuses of power. In these cases, a violation of business administration occurs by the business authorities.

- Internal control may become obsolete or inadequate. To counteract this limitation it is necessary that it be in constant evolution and development taking into account the current needs of the company.

- As a rigorous system, internal control should be free from errors; however, it is prone to breaking down from human errors that occur due to misinformation or confusion during employee interaction.

References

1. Romero, J. (2012) Internal control and its five components according to the COSO report. Retrieved on July 23, 2019 from Gestiopolis: gestiopolis.com
2. SA (2015) Limitations of Internal Control. Retrieved on July 23, 2019 from Update: actualicese.com
3. SA (2016) What are the five components of the COSO framework? Retrieved on July 23, 2019 from Knowledge Leader: info.knowledfeleader.com
4. SA (sf) Committee of Sponsoring Organizations of the Treadway Commission. Retrieved on July 23, 2019 from Wikipedia: en.wikipedia.org
5. SA (sf) COSO. Retrieved on July 23, 2019 from the Spanish Association for Quality: aec.es
6. SA (sf) Everything you need to know about the COSO report. Retrieved on July 23, 2019 from Vesco Consultores: vesco.com.gt
7. Salvador, A. (2016) COSO: risk management. Retrieved on July 23, 2019 from Internal WordPress Fraud: internal fraud.wordpress.com