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The COSO report: a new addendum results in GAO endorsement.

After several months of discussions, the Committee of Sponsoring Organizations (COSO) of the Treadway Commission published an addendum to Reporting to External Parties, a volume of its landmark report, Internal Control--Integrated Framework. On May 4, 1994, U.S. Comptroller General Charles A. Bowsher wrote COSO to say that "with the addendum, we believe the COSO Framework merits general acceptance for evaluating the effectiveness of internal controls."

Readers of the Journal of Accountancy will recall that the February 1993 issue included an article titled "The COSO Report: Challenge and Counterchallenge" (page 10). At that time, the position of the General Accounting Office was that "the COSO report in effect calls for a retreat from the public interest." The article included a letter from the then Assistant Comptroller General Donald H. Chapin (currently the GAO chief accountant) that set out six sweeping arguments against the COSO report. Robert L. May, then COSO's chair, responded "firmly and unequivocally." That response also was part of the article.

After little more than a year, these challenges and counterchallenges have been resolved successfully.

The new addendum "encourages managements that report to external parties on controls over financial reporting to also cover controls over safeguarding of assets against unauthorized acquisition, use or disposition." Those controls, according to the addendum, should be "designed to provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the entity's assets that could have a material effect on the financial statements."

The definitions of internal control in the COSO report are not changed by this addendum, which deals only with public reporting. However, its issuance has resolved the GAO's concerns and will mean that managements that decide to report publicly on internal controls will do so in a manner that meets the expectations of all interested parties. Those expectations, COSO has agreed, include "a reasonable expectation that a management report will cover not only controls to help ensure that transactions involving the entity's assets are properly reflected in the financial statements, but also controls to help prevent or timely detect unauthorized acquisition, use or disposition of the underlying assets."

Having endorsed the COSO report, Comptroller General Bowsher went on to "challenge COSO to take supporting actions to achieve the full potential benefits of the COSO report by actively working toward widespread adoption by the business community of public reporting on internal controls." COSO's chair, Gaylen N. Larson, has publicly accepted that challenge.

Achieving widespread public reporting on internal controls is not only a COSO objective. In its June 1993 position statement, Meeting the Financial Reporting Needs of the Future: A Public Commitment From the Public Accounting Profession, the American Institute of CPAs board of directors said, "To provide further assurance to the investing public, we join the [Public Oversight Board] in calling for a statement by management, to be included in the annual report, on the effectiveness of the company's internal controls over financial reporting, accompanied by an auditor's report on management's assertions .... The internal control system is the main line of defense against fraudulent financial reporting. The investing public deserves an independent assessment of that line of defense, and management should benefit from the auditor's perspective and insights...."

Back in October 1992, the GAO acknowledged that the COSO report "has sponsorship and general acceptance by most important private-sector interests." Now it has added its own endorsement. So, to repeat the exhortation made in the February 1993 issue of the Journal of Accountancy, "Let's get on with the task of implementing its recommendations!"

The addendum and the letter from Comptroller General Bowsher are included here for your review. Additional copies of the addendum (which has been mailed to all purchasers of the original four-volume COSO report) can be ordered from the AICPA order department. Call (800) 862-4272 and ask for product no. 990008JA.

An article on the subject will appear in the August issue of the Journal.

--Thomas P. Kelley, group vice-president-professional, American Institute of CPAs, New York City.

Mr. Kelley is an employee of the American Institution of CPAs and his views, as expressed in this article, do not necessarily reflect the views of the AICPA. Official positions are determined through certain specific committee procedures, due process and deliberation.
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Title Annotation:(includes transcripts of letter from Comptroller General Charles A. Bowsher and addendum to Reporting to External Parties); Committee of Sponsoring Organizations, General Accounting Office
Author:Kelley, Thomas P.
Publication:Journal of Accountancy
Date:Jul 1, 1994
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