COSO Internal Control Integrated Framework

Question: Discuss about the COSO Internal Control Integrated Framework. Answer: Introduction: World Com is a giant telecom company that came into spotlight for the accounting scandal in its books of accounts. The fraud was committed in the books of account in the two ways by reducing the reserve account and under reporting of expenses. The operating margin indicates the profitability of the company. The operating margin of the company has decreased sharply during 1998. In order to improve the operating margin the company used manipulative accounting technique so that company can project improved earnings (Knechel Salterio, 2016). The company passed fictitious accounting entries to increase the revenue amount and it was passed from the Corporate Unallocated Revenue account. The company reduced the reserve for covering the liabilities of the company acquired. The company from its reserve added $2.8 billion to its revenue. This resulted in increase in profit margin of the company constantly during the year 1999 and 2000. The current accounting manipulation is considered inadequ ate to maintain the same level of earnings by 2001. In 2001, the profit margin of the company has decreased to half as compared to the previous years (Martin et al., 2014). The second way in which the World Com has performed fraud is by under reporting of expenses. The company has under reported the line cost so that stock price of the company is increased. The line cost of the company includes expenses for inter connection with other telecommunication companies. The company in the year 2000 actually suffered a loss of $649 million (Kiesow et al., 2015). However, by performing fraud the company reported the profit of $2608 million in the same year. The company reported the expenses as capital investment and it was shown in balance sheet. The company made this fraud to show that the company is earning more by making fewer expenses. The company transferred into the capital account the current expenses. The company by understating the expenses boosted the net income of the company and as the expenses was capitalized so the assets of the company has increased from 1999 to 2001. Therefore, it can be said that the company has avoided a loss of billion dollars by capitalizing the line cost instead of expressing it as expenses. The Sarbanes-Oxley Act of 2002 (SOX) provides the initiative for discloser of financial information. The SOX Act encourages greater initiative for the financial information disclosure. The key section of the SOX that relates to the activity is section 404. The section 404 of the SOX provides that the external auditor should evaluate the effectiveness of the internal control on the financial reporting process. The executive of the HealthSouth is engaged in the fraudulent activity. The executive have committed fraud by following three steps. Firstly, the company analyzed the financial statement to determine if the expectation of the analyst is meet. Secondly, if the earning of the company is short then the management manipulates the results for suiting the purpose as necessary. Thirdly, the management created false documents so that the false entries in the books of the accounts are concealed. The widespread fraud was prevalent in the company of the Health South and even the auditors allowed the fraud to be continued (Luo, 2015). The section 303 of the SOX Act deals with the improper influences on the conduct of audit. The section 303 provides that it will be unlawful to influence the performance of an auditor engaged in providing independent opinion on the financial statement. In this case, the management of the company has violated the provision of the act by influencing the opinion of the auditor. The SOX Act provides that alteration of document is a criminal offence that attracts penalties under section 802 of the SOX Act. The section 108 of the SOX Act requires the company to prepare the financial statement in accordance with the accounting standards. In this case, the company has engaged in fraud so the section 108 of the act is violated. In this question the three article is discussed to examine the change that have taken place in the role of audit committee and internal audit after the passing of SOX Act. The first article by Cynthia et al., 2011 in Highlights of Corporate Governance Research. Journal of Accountancy states that the Sarbanes-Oxley Act of 2002 motivates recent corporate governance initiatives (SOX). The article discusses the role that the internal audit plays in detecting the material weakness. It is stated in the article that the role of the internal auditor mainly focused on detecting weakness in control. The scope of the internal audit have widened after the recent developments. The internal audit not only includes detection of the material weakness but also provides opinion on the financial statement. The article shows that significant change have taken place after passing of the SOX Act (Karanja Zaveri, 2014). In the article of Corporate Governance in the Post-Sarbanes-Oxley by Cohen et al., 2010 states that responsibility of management, auditor and corporate governance has significantly expanded after the Sarbanes-Oxley Act 2002. In this article, an interview-based research was conducted in which three of the four big audit firms participated. The auditors indicated that there is a significant improvement in the corporate governance scenario across the world. It was found that the audit committees are performing their responsibility with more responsibility. In the Shu Lin et al., 2011 the article for The Role of the Internal Audit Function in the Disclosure of Material Weaknesses. The Accounting Review discuss the role related to the internal audit function (IAF). The section 404 of the Sarbanes-Oxley Act of 2002 states that disclosure of material weakness should be reported under section 404 of the Sarbanes-Oxley Act of 2002 (Spears et al., 2013). This study investigates the role of the internal audit function in the disclosure of the material weakness. The data of 214 firms were used to study the relationship between the disclosure of material weakness and the attributes and activities of internal audit functions. The result of the study indicated that the disclosure of material weakness is negatively related with the level of education of the IAF. It is also found in the study that the practice of the grading of the audit engagement and the disclosure of material weakness have a positive relationship. The coordination of the internal and external auditor suggests that these activities increases the effectiveness of the compliance process of section 404. 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