COSO Framework: What It Is and How You Can Implement It

Photograph of a sign post pointing to 'Ethics and Compliance'.
Situated in the town of risk management and internal control.

The Committee of Sponsoring Organizations of the Treadway Commission framework, or COSO Framework, is a system for managing businesses. Used globally, it’s a de-facto standard you’ll find in many businesses. 

In essence, the COSO framework deals with organizational risk. It looks at your company’s compliance, finance, and internal auditing policies. To this end, you can think of the COSO framework as an internal risk control measure. Consequently, every member of your organization needs to adhere to this measure.

In this article, I’ll show you what the COSO Framework is. I’ll also talk about its implementation and how you can maintain it. Let’s begin with a brief overview of the COSO Framework.

What Is the COSO Framework

Designed in the early 90s, the COSO Framework reduces a business’s operational risk with control and monitoring measures. Above all else, this process is iterative and requires regular review to ensure initial control measures are working as intended. To this end, the COSO committee produces guidance documents designed to help organizations. These documents are continually updated as better practices come to light. They revolve around the following business processes: 

  • Conducting risk assessments
  • Establishing and maintaining internal governance strategies
  • Implementing fraud mitigation measures

To achieve internal organizational control, you must first manage and maintain 5 key business components. Let’s have a look at those now.

5 Components of the COSO Internal Control System

You need to consider these 5 components during the planning and maintenance of a business control system. You need to keep in mind 3 objectives when striving to maximize the value of each component:

  1. Operations
  2. Reporting
  3. Compliance

When considering the five components, think about them in the context of fulfilling these 3 objectives. Now, I’ll talk about each of the five components in detail.

Venn diagram showing different technologies used in innovative products. Multiple intersections between technologies show why using the COSO framework is a good idea.
Imagine assessing internal control for just one product development activity!

1. Control Environment

You’ll need to consider the following when assessing your organization’s internal controls:

  • Ethics: This effectively refers to the mission statement and building your company’s policies around core ideals.
  • Business Structure: This refers to your business’s regulatory definition along with workflow control. 
  • Employee Competence: This helps to grow your business and deter shrinkage through counterproductive activities.
  • HR Policy: This can help retain employees or decrease staff turnaround. 

These factors are important because they form the overall structure of your organization. If these factors aren’t monitored properly, you won’t have a controlled work environment. This will ultimately negatively affect your business control system.

2. Risk Assessment and Management

Your business is always at risk. To protect it, conduct regular risk assessments and manage risk through a coherent strategy. This could be quantifying risk based on probability and severity. You’ll also need to consider change management as part of your risk assessment process. Finally, in terms of technology, you can use operational risk assessment software to aid you.

3. Control Activities 

This refers to adhering to business policies and planning contingency measures. It can also mean controlling outsourcing or insourcing tasks to meet your business needs. To enable all these activities, IT infrastructure needs security and change management strategies to control change. That said, you’re advised not to change workflows unless they’ve met your defined acceptable change criteria. This stops ad-hoc changes leading to individual customizations of end-user platforms. This means less user support and system update headaches for administrators. 

4. Information and Communications

Measuring the quality of information and communication within your business is vital. In essence, this removes ambiguity between individuals, teams, divisions, and management. If information is missing, or you have a breakdown in communication, your productivity will slow down. This can lead to accidents, missing schedules, and business shrinkage.

5. Monitoring

Monitoring and continuous improvement of your business are necessary to make it leaner, grow faster, and reduce slack. Many companies are also looking at integrated platforms to help improve the visibility of processes, reduce data leaks, and enable centralized monitoring and reporting. This isn’t very useful for productivity, though. Instead, it helps meet third-party standards–these could be regulatory requirements or industry standards. 

Let’s now take a look at how these five components come into play using the COSO cube.

Understanding the COSO Cube

When you’re dealing with COSO best practices, you’re implementing a three-dimensional iterative process. The COSO cube diagram can help explain the process visually:

schematic of the COSO cube. The diagram shows three sides of a cube and how they relate to one another.
A Rubrics cube of iterative control activities.

As you can see, the COSO cube’s front shows the five components I discussed previously. The top of the cube shows the three objectives you need to apply the components to; I touched upon these objectives earlier. Lastly, the right side of the cube shows the business levels that you need to consider in relation to the components and objectives.

Now let’s take a look at how you can implement the COSO Framework.

How to Implement the COSO Framework

The COSO Framework is effectively a top-down planning tool for internal control and governance of a business. As such, it relies heavily on management to create clearly defined policies to implement lower tiers of the COSO Framework. Ideally, management should collect information on the business as part of the planning process. This is the first process of the framework; let’s analyze these stages further.

Plan Ahead

To implement COSO you have to clearly define what your business is as an entity. You might’ve already done this using a mission statement, where you defined your business’s goals and aspirations. 

That said, to implement COSO effectively you need to define more top-level policies. For this, you’re going to need help. You’ll need to talk to business consultants who specialize in creating road maps. You can also talk with key workers, groups, or steering committees. When you do this, you reduce your biases of what you perceive your business to be. In addition, managers have their own business commitments to fulfill. As such, they won’t pay much attention to planning and implementing a COSO change.

Evaluate and Document Everything

In this stage, a business consultant can help your organization immensely. This is because you’re unlikely to know how to document your business correctly. A consultant can document and evaluate existing processes, divisions, and operational controls. Here, the process isn’t one-sided. You’ll need to read and analyze every document before signing off each milestone. This enables you to better understand how your business works like you never have before. In addition, you’ll be holding the third-party accountable for the work requested.

Many companies use their own product lifecycle management (PLM) solution to handle their workflow process, much like they do for their products or offerings. This allows them to track changes through version control. 

Keeping records is a good idea, but you’ll need to find a safe place for the released documents. Obviously, storing documents about the business on an IT solution you’re using isn’t wise. Assume catastrophic failure of all systems and keep documents in multiple locations and on different media. This is necessary as you don’t want to have to compile and internally audit business documentation more than once!

Finally, ensure all reviewed documents have a versioning process that stops accidental editing of released documents. To this end, use a PLM solution to handle the workflow and control user access policies.

Photograph showing files being stored suspended on racks within labeled folders.
Business documentation must be managed and maintained to a logical business policy.

Monitor and Fix as Needed

Once you update your business documentation, you’ll need a way of making changes and updates to reflect business requirements. The same workflow you used to release your documents should have an iterative component to it with an integrated review and approval process. A PLM solution, in this case, allows you to do this for each document easily and you can audit every change to every document. This is important, as you cannot have any uncontrolled changes to documentation or associated business practices. Otherwise, you don’t have any internal control at all. In turn, auditing or meeting regulatory requirements becomes impossible. A PLM solution helps ensure all remediation to any business system is clear to internal users and external stakeholders. 

Test and Report Data

Business testing falls into two methods; qualitative and quantitative. Ideally, you want quantitative data. You’ll also want to report it in real-time using a centralized reporting tool. This is because quantitative data is less subjective and can be easily scrutinized. That’s not to say that qualitative data is useless. It does, however, require more interrogation to theorize what’s happening in your business.

In a real-world environment, you’ll have both systems. You’ll also need to scrutinize the level of resolution required for each testing strategy. Likewise, reporting must be easy to comprehend and used to continually benchmark a business’s control. You may also have control limits to help you see a result is within a healthy variation. If not, it likely needs attention.  

Optimize Your Internal Controls

Optimizing a business’s controls relates to data collection and reporting. You need to have effective monitoring tools to evaluate your systems. You also need your business processes to be well-documented. In addition, you need a robust internal review process. Again, think about using a business solution like PLM that mimics business operations.

And there you have it! You’re now a master of implementing and maintaining the COSO Framework. Let’s have a quick recap below.

Final Thoughts

The COSO Framework is a useful tool for strategic planning and implementing business control systems. It helps define an iterative evaluation and improvement process for all aspects of internal business control. This article looked at what a COSO Framework is and how you can implement and maintain it. Feel free to refer back to it should you ever need to.

If you find that the COSO framework isn’t for you or doesn’t give you enough details on key control measures, try looking at top-level business ISO standards for help. If you follow these standards, you’ll often meet both COSO Framework requirements and regulatory compliance at the same time. After all, adhering to one set of standards is better than not adhering to any.

Do you have more questions on the COSO Framework? Check out the FAQ and Resources section below for more information!

FAQ

What is the COSO Framework?

The COSO (Committee of Sponsoring Organizations of the Treadway Commission) Framework is a business model to help clearly define internal business control measures. Integrating these control measures is vital to help your business operate efficiently up to industry standards. Periodically, this committee releases updates on industrial best practices for businesses to adhere to if they desire.

What is a PLM solution?

A PLM (product lifecycle management) solution is a platform that mimics business operations and workflows. Using one helps improve auditing, reduces accidental changes, and ensures you only get updated documents. In essence, a PLM solution is a digital version of the business and helps users work effectively using current information only.

Why do I need business documentation?

Most businesses today use a software-based solution such as PLM to manage business operations. The challenge is that many users don’t understand that without clear business policies and control measures, a 100% software-based solution is useless. To this end, you need to know and document your business controls first to implement them in software solutions effectively.

What are the five components of the COSO Framework?

The 5 components of the COSO Framework are:

  1. Control Environment
  2. Risk Assessment
  3. Control Activities
  4. Information and Communication
  5. Monitoring

Use these components to construct a complete internal control solution for your business. That’ll help you to grow it effectively, enhance internal visibility, and help conduct audits. 

Should I use ISO standards with the COSO Framework?

Many practices used by the COSO Framework are based on industry best practices. Likewise, so are those defined by the international standards organization (ISO). Both review best practices and release information periodically. That said, ISO standards inform regulatory policy. As such, you should look at how you can apply these standards to each task of the COSO Framework delivery to ensure you don’t miss anything.

Resources

TechGenix: Article on Data Management as a Service (DMaaS)

Discover how you can manage your data with DMaaS.

TechGenix: Article on Data Backups

Ensure you can recover vital documentation during a system shutdown.

TechGenix: Article on Document Management Options

Read about how four startups are making waves in document management.

TechGenix: Article on Data Lifecycle Management Policies

Get up to speed with data lifecycle management (DLM) policies.

TechGenix: Article on Project Management Tools

Learn how to manage projects within your organization.

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