What is the COSO Framework?
The COSO framework comprises three dimensions: objectives, components, and organizational structure of an entity. They are modeled in a cube diagram.
The cube illustrates the direct relationship that exists between the three dimensions:
- objectives, which are what an entity strives to achieve
- internal control components, which represent what is required to achieve the objectives
- organizational structure of the entity
The iconic COSO cube depicts the relationship between all aspects of an efficient internal control system. The columns consist of the three objective categories (operations, reporting, and compliance). The rows represent the five components. The side end of the cube forms the organizational structure.
What are the 3 COSO Objectives?
The COSO principle defines three categories of goals, which give organizations a framework on which to adopt a series of internal controls to build a COSO control environment that achieves the objectives.
These pertain to the efficiency of the entity’s operations, including operational and financial performance goals. They ensure that:
- Processes and procedures to ensure that work is carried out successfully and efficiently
- that operational gaps are eliminated
- To make sure that sales, production, and other areas targets are continuously monitored
- Company assets are tracked and distributed to meet operational goals.
These pertain to internal and external financial and non-financial reporting and may encompass reliability, timeliness, transparency, or other terms as set forth by regulators, recognized standard setters, or the entity’s policies.
The financial reporting objective puts the responsibility on the company for preparing the financial statements to present to the Board of Directors, investors, creditors, and other users of the financial statements.
Non-financial reporting includes ESG reporting and other corporate Social Responsibilities. Companies are increasingly being evaluated based on how successfully they work toward the objectives of sustainable environments. To achieve this, they must gather data on their social, economic, and environmental standing and report the data to stakeholders. The COSO framework can be leveraged to satisfy the demands of both internal and external stakeholders for stronger non-financial reporting.
These pertain to adherence to laws and regulations to which the entity is subject.
COSO compliance objectives ensure that the organization follows all state, local, federal, and industry-specific laws and regulations Compliance can range from areas like labor laws to privacy laws, and even touch on environmental protection mandates. Staying on top of the changing landscape of compliance is necessary to continue to operate a business.
SOC 1 audits put a spotlight on the concept of internal controls. Therefore, meeting the three objectives of the COSO framework principles is especially important for SOC 1 compliance.
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