According to the Committee of Sponsoring Organizations of the Treadway Commission (COSO), internal control over financial reporting can be viewed as consisting of five interrelated components, which serve as the criteria for determining whether internal control is effective. The five components described by COSO are:
- Control environment
- Risk assessment
- Control activities
- Information and communication
- Monitoring
Recently COSO has focused on issuing guidance about the monitoring component of internal control because it believes that monitoring has often been underutilized by organizations of all sizes. COSO has issued a discussion document, which is designed to further develop the understanding of effective monitoring so that organizations can recognize and properly utilize effective monitoring where it exists, and implement effective monitoring where it is needed. The document discusses three primary elements of monitoring that influence its effectiveness and efficiency:
- The control environment in which monitoring operates;
- The organization’s ability to prioritize effective monitoring procedures and devote monitoring resources commensurate with the underlying level of risk; and
- The organization’s communication structure and its ability to report results of monitoring, including control weaknesses, to the right people in a timely manner.
The document is the first phase of the broader COSO monitoring project, which is intended to improve the understanding of the building blocks of effective monitoring, thereby improving both the efficiency and the effectiveness of the entire system of internal control. The second phase of the monitoring project, scheduled for release after comments are received on the current discussion document, will provide examples, case studies, and tools to assist all organizations in implementing effective and efficient monitoring. COSO intends to release an exposure draft of the full implementation guidance later this year and intends to release the final guidance in the first quarter of 2008.
The discussion document related to the first phase of the COSO monitoring project is available for comment until October 31, 2007 at http://www.coso.org/Publications/COSO_Monitoring_discussiondoc.pdf. |
