How to Implement the COSO Framework for Stronger Internal Controls?

“Most of the time, security is about discipline and processes around crucial activities—like how you onboard or offboard employees or push code to production,” says Girish Redekar, co-founder at Sprinto, while highlighting a fundamental truth about building resilience.

A set of structured processes and disciplined execution is the key to weaving a strong security fabric and managing risks. However, you don’t need to build these from scratch; instead, you can use proven frameworks like COSO to adopt a comprehensive approach to building and implementing internal controls.
The COSO framework is popular among organizations for its guidance on establishing internal controls to strengthen security and achieve compliance excellence. In this blog, we’ll cover the framework’s fundamentals and the steps to implement the framework.

What is the COSO framework?

The COSO framework is a structured set of guidelines for designing and implementing internal controls, aligning them to business operations, and ensuring transparent reporting and compliance. 

In 1992, the Committee of Sponsoring Organizations of the Treadway Commission or COSO, first developed the Internal Control-Integrated Framework for designing, maintaining, and assessing internal controls, especially to combat financial reporting fraud. The framework was updated in 2013 to reflect increasing business complexities, evolving needs, globalization, and technological advancements.

The next significant change was made in 2017, with a broader emphasis on enterprise risk management. It emphasizes the importance of visualizing potential risks and controls in an interconnected manner to achieve strategic objectives, drive performance, and enhance organizational resilience. The COSO Enterprise Risk Management framework also goes hand in hand with the internal control framework.

Why is the COSO framework essential?

The COSO framework is essential as it serves as a gold standard for organizations to manage internal controls while building an interconnected view of risks. It provides a proven and comprehensive approach for businesses to safeguard assets, ensure compliance, and achieve business objectives. This is crucial for sustainable success in the evolving landscape with growing threat sophistication and regulatory complexities.

Adopting the framework also eliminates the need to create a system from scratch while making it simpler to demonstrate compliance. The framework is also industry-recognized, so it enhances trust among stakeholders. Moreover, it is constantly updated to stay abreast of modern business requirements. For example, in 2023, COSO released guidelines on achieving effective internal control over sustainable reporting to help businesses address environmental, social, and governance (ESG) requirements.

What are the five components of the COSO framework?

The components of the COSO framework are like the building blocks for creating effective controls. They help you identify challenges and show you the best path forward to build a strong and efficient program. These components are further supported by 17 internal control principles for expanded guidance.

The five internal control components of the COSO framework are:

1. Control environment

The control environment is the foundational interconnected control system that sets the tone for the organization to create ‘control consciousness’— an understanding of the importance of internal controls in managing risks.It is shaped through organizational governance and culture where leadership demonstrates commitment to integrity and ethical practices and employees understand the importance of controls and strong governance. The goal is to instill the right attitude towards risk management.

Key principles under control environment include:

P1: The organization is committed to acting with integrity and demonstrating ethical values

P2: The board of directors operates independently from the management and guides how the controls are set up and maintained

P3: The management, working under the board’s direction, establishes clear roles, responsibilities, and reporting channels.

P4: The organization is dedicated to attracting and keeping top talent aligned toward goal achievement

P5: The organization holds people accountable for ensuring effective internal controls.

2. Risk assessment

The next pillar focuses on identifying, assessing and managing internal and external risks that an organization could face due to various factors. It emphasizes the need for regular risk assessments to proactively address risks and possibilities of fraud with appropriate mitigation measures.

Key principles include:

P6: The organization sets clear goals to identify and assess risks

P7: The organization evaluates risks that could hinder the achievement of objectives and creates a mitigation plan

P8: The organization also considers the possibility of fraud when determining risks

P9: The organization determines any changes that could impact the internal control system

3. Control activities

Control activities are a set of policies, procedures and actions that help the organization achieve the set objectives while mitigating identified risks. These controls may be preventive (designed to identify issues before they occur) or detective (designed to identify issues after they occur) and manual or automated.
Control activities cover a range of areas including approvals, authorizations, reconciliation and business performance reviews. It also focuses on segregation of duties and general control activities over technology to ensure information security.

Key principles under control activities include:

P10: The organization selects and develops control activities to reduce risks to manageable levels

P11: The organization implements technology-related controls that support the achievement of objectives

P12: The organization sets policies to communicate the expectations and lays down procedures to help translate them into action

4. Information and communication

The information and communication component ensures that timely, accurate, and reliable information flows org-wide. Management must obtain high-quality information from internal and external sources, such as metrics or regulatory updates, to make well-informed decisions. The key stakeholders must also receive the required information to support control activities.

Key principles include:

P13: The organization collects and uses accurate and reliable information to support the effective functioning of internal controls

P14: The organization shares information about goals and objectives within the company

P15: The organization communicates with external stakeholders regarding issues that can impact internal controls

5. Monitoring activities

Monitoring activities include ongoing and separate or periodic evaluations of internal controls to ensure they function as intended at different entity levels. The goal is to pinpoint deficiencies and initiate corrective actions to enhance the performance of the internal control system.

Key principles include:

P16: The organization regularly checks whether the right controls are in place and if they are functioning well

P17: The organization identifies and communicates internal control deficiencies to senior management on time, to initiate prompt actions

How to implement the COSO framework?

The COSO framework implementation involves initial assessments, gap analysis and remediation plans and take anywhere between 3 months to 12 months depending on the size of the organization and complexity of operations.

Here are 6 steps to implement the COSO framework:

1. Anchor the culture at the top

Sure, you can hire external help to implement the framework, but an attitude of commitment to security must be set at the top. An internal message echoes better among peers and co-workers and gradually translates into culture. So begin by securing leadership buy-in and helping them understand the importance of the framework implementation and its ROI.

2. Begin with the scoping exercise

Once leadership is on board, review the framework’s requirements and identify key areas that impact the organization’s objectives. Covering the entire organization can be costly, so the scoping and prioritizing exercise helps determine which business units, processes, and systems should fall under the framework’s purview. Typically, this will include financial reporting, compliance, and IT systems.

3. Conduct risk assessment and analyze gaps

Engage with key stakeholders to gather information on risks associated with various functions, such as fraud, IT vulnerabilities, financial misreporting, or compliance failures. Document these risk categories and map them with existing controls—current policies, procedures, technical safeguards, and practices. Identify the gaps and deficiencies and prioritize the gaps that pose the most impact.

4. Design or enhance controls

Next, the appropriate controls for the identified risks and gaps are designed, choosing from preventive, detective, or corrective controls. Some existing controls may simply require enhancements, such as implementing automated systems for monitoring transactions. Assign control owners with clear roles and responsibilities and ensure they understand the purpose of the controls.

5. Integrate controls with operations

Once the mitigation plan with the required control design and enhancements is ready, begin the implementation phase, which involves integrating controls with existing business processes. For example, adding periodic reviews to transaction logs. The integrations will require new or updated SOPs for stakeholders to comply with the internal controls and training programs to help them execute.

6. Continuously monitor

Establish an ongoing monitoring mechanism to evaluate control performance and identify any loopholes in design or implementation. Conduct regular internal audits and document results and control activities. The documentation will help you iterate, improve, and serve as evidence when preparing for external auditor engagements.

Benefits of the COSO framework

The COSO framework is liked for its comprehensive approach, alignment with other frameworks, and establishment of the interconnectedness between risks and controls.

Here are the key benefits of adopting the framework:

Supports other frameworks

The COSO framework’s foundation is based on strong governance, risk management, and robust internal controls, which also help with the groundwork for other frameworks. Its principles are, in fact, embedded in frameworks like the NIST Cybersecurity Framework, COBIT, and ISO 31000. The framework is also considered a best practice to meet requirements for the Sarbanes-Oxley Act (SOX).

Enhances internal control efficiency

The COSO framework standardizes key concepts related to the internal control system to establish clarity. Secondly, it emphasizes risk assessments and targeted responses using preventive, detective, and corrective controls. It also promotes the integration of internal controls with operational activities to minimize siloed activities and support larger business objectives. The promotion of accountability and board oversight helps with the timely redressal of control gaps and all the efforts together enhance the effectiveness of controls.

Promotes fraud prevention

The COSO framework clearly talks about ethical leadership, a code of conduct, and a culture of transparency and accountability. It specifically includes fraud risk considerations for organizations to implement the right controls before such cases escalate. The framework also emphasizes continuous monitoring and periodic audits to detect any control deficiencies that could lead to fraudulent activities.

Creates a risk-aware culture

The framework highlights the interconnected nature of operational and compliance risks and the relationship between risks and controls. It also supports setting the tone at the top and making risk-informed decisions while encouraging open communication about risk management across all levels of the organization.

Offers implementation resources

COSO offers several guidance documents, checklists, case studies and implementation resources to help organizations easily implement the framework. It also in fact collaborates with advisory and consulting services to provide hands-on support to organizations.

Challenges of COSO framework

On the flip side, the COSO framework is criticized for its broad-level guidance, stringent and complex requirements, and overemphasis on financial reporting.

Check out these challenges of COSO framework:

Requires interpretation to apply

The COSO principles and guidelines are fairly broad and subject to interpretation. Organizations can fall into various categories and the implementation requires subjective judgements making it prone to human errors and bias. So, the flexibility it offers is a double-edged sword and creates challenges for organizations looking for specificity.

Has complex requirements

The framework has a comprehensive structure to help build an internal control system. The immense detail in the five components can feel overwhelming, especially for organizations with less security maturity. It also requires customization according to the unique business context, risks, and culture, which can add complexity to the process.

Overlooks non- financial risks

The framework focuses excessively on fraud and financial risks, financial reporting, accounting, and compliance. It hardly talks about reputational risks, cybersecurity risks, or even strategic risks. This limits the framework’s scope and makes it less suitable for organizations in the non-financial sector.

Resource intensive

The COSO framework’s core principles focus on documentation, reporting, and collaboration across various departments. The framework also discusses continuous monitoring, which requires establishing systems and processes. Moreover, the high-level framework requires organizations to tailor it to specific needs. All this can be resource-intensive, making it difficult for smaller organizations to adapt the framework well.

Specific challenges in principles

There are also some specific challenges in principles, such as demonstrating that the board operates independently from the management (principle 2). Similarly, principle 4 talks about attracting and maintaining top talent, but it can be difficult to produce evidence of how well-equipped the control owner is. It also does not take into account the issues of staff turnover, burnouts, inadequate training and other personnel issues.

Manage and Strengthen Internal controls with Sprinto

Robust internal controls are the building blocks of a fail-proof security architecture, as they help mitigate risk, meet compliance objectives, and achieve strategic goals. Adopting frameworks like COSO can be a good step in providing ‘reasonable assurance’ on baseline processes and taking the first step in achieving security maturity. However, most organizations fear breaking routine systems and processes when implementing the controls, as the process is complex and resource-intensive. Try Sprinto.

Sprinto features a centralized control library wherein you can enable the applicable frameworks and see controls that apply. The tool integrates with your tech stack with 200+ native integrations and responsive APIs to build a connected view of risks and controls. It also utilizes the API and integration based evidence capture from source systems to automate control testing at a granular level and sends multi-channel alerts in case of any deviations.

Sprinto automatically captures evidence of control activities and helps you track control status in real-time on the health dashboard.

Features like policy templates, training modules, senior management reviews, role-based access controls, and vulnerability management help you build a fully connected and automation-enabled GRC program.

We’ve helped thousands of customers to build compliance programs from scratch to certification. Watch the platform in action and kickstart your journey.

FAQs

Is the COSO framework mandatory?

No, the COSO framework is not mandatory. However, the voluntary framework is highly adopted by organizations because of its guidelines for designing and maintaining internal controls and alignment with various regulatory requirements.

How is SOX related to COSO?

COSO provides a widely accepted framework for designing and evaluating internal controls. Companies subject to SOX often use it as the primary framework to satisfy the requirements, particularly section 404, which discusses internal controls over financial reporting.

Who does the COSO framework apply to?

COSO applies to any organization seeking to establish effective internal controls, manage risks, and ensure compliance. However, it is popular among publicly traded companies and financial reporting industries.