Financial accounting frauds and the attention they bring are not new. Fortunately, neither are the accounting profession’s ongoing attempts to limit these types of fraud by encouraging strong systems of internal control. In October 1986, amid growing concerns about the extent of fraudulent financial reporting, the National Commission on Fraudulent Financial Reporting (the Treadway Commission) began an extensive study and evaluation of the integrity of the U.S. system of financial reporting. The Treadway Commission’s final report, issued in 1987, provided numerous recommendations for improving the financial reporting environment and auditing standards. In response, the Committee of Sponsoring Organizations (COSO) developed a comprehensive, integrated model of internal control to offer guidance for creating, adapting, and monitoring systems of controls. This integrated framework was later tailored to practitioners by the Auditing Standards Board (ASB) through SAS 78.

While people are now more interested in internal control evaluations by corporations, auditors, and auditing standards-setters due to SAS 99, Consideration of Fraud in a Financial Statement Audit, and the Sarbanes-Oxley Act of 2002, relatively little factual data is available to confirm or deny the efficacy of the interrelated internal control components embraced by COSO and codified in the professional standards under SAS 78. To illuminate such data, the authors compiled an analysis of internal control weaknesses communicated by 32 Rhode Island state agencies using the framework mandated by SAS 78.

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Copyright © 2004 The New York State Society of CPAs. This article first appeared in The CPA Journal, January 2004, 28-31.

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