What are the Five Components of COSO?

The Committee of Sponsoring Organizations of the Treadway Commission (COSO) came up with a series of measures to determine the best way to evaluate a business’ internal controls in 1992. According to this model, internal control is defined as “a process, effected by an entity’s board of directors, management and other personnel, designed to provide reasonable assurance of the achievement of objectives” across a range of categories. These include:

• Compliance with guidelines, laws and regulations
• Accuracy of financial reporting
• Efficiency of operations

In order for the control system to be considered effective, COSO has identified five components that, when aligned, can support the achievement of the company’s objectives. So, what are these five components and what do they mean? Control Environment: This sets the tone for the business and is an influencer on the control consciousness of a company’s workforce. Things to be considered here include ethical values, management philosophy, the level of commitment to competence, and HR policies. Control Activities: These are the procedures adopted by a firm to ensure its control measures are enforced. Risk Assessment: Leaders need to identify what the relevant risks are that could form potential barriers to the completion of their objectives. Using this information, they should form basic plans on how these obstacles can be managed or avoided. Monitoring: To be able to determine how successful a company is at achieving its aims, accurate monitoring processes need to be used to assess the quality of internal controls over a period of time. Information and Communication: This involves the consideration of what and how information is captured that can support staff in carrying out their duties. These components should continually be observed to ensure they remain relevant to the organisation’s mission. In doing so, it is considered to be much easier to manage potential problems and improve the efficiency of operations. [block id=”1068″]