COSO ERM Framework
The Committee of Sponsoring Organizations (COSO) of the Treadway
Commission1
is guiding force behind the COSO Enterprise Risk Management (ERM)
framework which emphasizes the importance of identifying and managing
risks across the enterprise. While many organizations perform risk
management within each subdivision, the vision of COSO is that these
risks are aggregated and viewed from the top as an overall portfolio
of risk. COSO is the predominant risk framework organizations use in
compliance with Sarbanes-Oxley Act of 2002, and is a base of the
Japanese Financial Internal Controls
act ("JSOX").
The COSO ERM framework incorporates and expands upon COSO's
groundbreaking 1992 study, Internal Control–Integrated Framework,
which many organizations adopted, especially with the reporting
requirements of Sarbanes-Oxley.
COSO's new ERM framework consists of eight components: internal
environment, objective setting, event identification, risk assessment,
risk response, control activities, information and communication, and
monitoring. The three new components of the COSO framework are
objective setting, event identification, and risk response. And the
five taken from the control model are broader in their descriptions
and in terms of the practical guidance. Author PricewaterhouseCoopers
estimates that 60 percent of the new document is leveraged from COSO's
earlier work. But because risk is a more all-encompassing topic than
internal control, the resulting discussion found in the new framework
is much more comprehensive than its predecessor.
From a broader perspective, the framework is expected to be a useful
tool that boards and other stakeholders can use to measure how well
their management teams are handling the risks they face. It is
designed to answer the question, "Do we have a risk management program
in place in our organization?"
COSO also hopes that exposing the framework for public comment will
help ensure its validity and power.
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1
COSO is a voluntary private sector organization dedicated to
improving the quality of financial reporting through business
ethics, effective internal controls, and corporate governance. COSO
was originally formed in 1985 to sponsor the National Commission on
Fraudulent Financial Reporting, an independent private sector
initiative which studied the causal factors that can lead to
fraudulent financial reporting and developed recommendations for
public companies and their independent auditors, for the SEC and
other regulators, and for educational institutions.
The National Commission was jointly sponsored by the five major
financial professional associations in the United States, the
American Accounting Association, the American Institute of Certified
Public Accountants, the Financial Executives Institute, the
Institute of Internal Auditors, and the National Association of
Accountants (now the Institute of Management Accountants). The
Commission was wholly independent of each of the sponsoring
organizations, and contained representatives from industry, public
accounting, investment firms, and the New York Stock Exchange.
The Chairman of the National Commission was James C. Treadway, Jr.,
Executive Vice President and General Counsel, Paine Webber
Incorporated and a former Commissioner of the U.S. Securities and
Exchange Commission. (Hence, the popular name "Treadway
Commission"). Currently, the COSO Chairman is John Flaherty,
Chairman, Retired Vice President and General Auditor for PepsiCo
Inc.
http://www.coso.org/
