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COSO framework in brief.

The Committee of Sponsoring Organizations of the Treadway Commission (COSO) is a private-sector initiative that provides thought leadership and guidance on enterprise risk management, internal control, and fraud deterrence. COSO was formed in 1985 as a joint initiative between five major professional organizations, collectively known as the sponsoring organizations. These organizations are:

  1. American Accounting Association (AAA)

  2. American Institute of Certified Public Accountants (AICPA)

  3. Financial Executives International (FEI)

  4. Institute of Internal Auditors (IIA)

  5. Institute of Management Accountants (IMA)

The primary objective of COSO is to address the increasing need for guidance on internal control and enterprise risk management within organizations. COSO gained prominence with the publication of its original Internal Control-Integrated Framework in 1992, commonly referred to as the COSO Framework.

Key Components of the COSO Framework:

  1. Control Environment:

  • The overall attitude, awareness, and actions of an organization regarding the importance of internal control.

  1. Risk Assessment:

  • The identification and assessment of potential risks that may impact the achievement of organizational objectives.

  1. Control Activities:

  • The policies and procedures implemented by an organization to address and mitigate identified risks.

  1. Information and Communication:

  • The flow of relevant information within an organization to support effective internal control.

  1. Monitoring Activities:

  • The ongoing assessment and evaluation of the effectiveness of internal control processes over time.

COSO Enterprise Risk Management (ERM) Framework:

Building on the success of its Internal Control Framework, COSO introduced the Enterprise Risk Management (ERM) Framework in 2004 and subsequently updated it in 2017. The COSO ERM Framework expands on the concepts of internal control to address a broader scope of risk management within an organization. It is designed to help organizations integrate risk management into their strategic planning and decision-making processes.

Key Components of the COSO ERM Framework:

  1. Governance and Culture:

  • The organization's tone at the top, leadership, and culture regarding risk management.

  1. Strategy and Objective-Setting:

  • The process for setting and aligning organizational objectives with its mission and values.

  1. Performance:

  • The execution of strategy and achievement of objectives, considering risk appetite.

  1. Review and Revision:

  • The ongoing evaluation and adjustment of the risk management process.

  1. Information, Communication, and Reporting:

  • The flow of relevant information to support effective risk management and communication both internally and externally.

The COSO Frameworks are widely recognized and adopted globally. They provide a structured approach for organizations to enhance their internal control and risk management processes, aligning them with strategic objectives. The frameworks are particularly relevant in regulated industries, including the financial sector, where effective governance and risk management are critical components of operational success and regulatory compliance.

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