Fraud Risk Management Guide (2016)
The Fraud Risk Management Guide is intended to be supportive of and consistent with the 2013 Internal Control — Integrated Framework. For organizations desiring to establish a more comprehensive approach to managing fraud risk, this guide includes more than just the information needed to perform a fraud risk assessment. It also includes guidance on establishing an overall Fraud Risk Management Program including: establishing fraud risk governance policies; performing a fraud risk assessment; designing and deploying fraud preventive and detective control activities; conducting investigations; and monitoring and evaluating the total fraud risk management program. The guide includes five principles that are consistent with the five COSO Internal Control Components and the 17 COSO principles.
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COSO’s latest research project analyzes 347 fraudulent financial reporting cases among U.S. public companies for the 10-year period 1998-2007. This study updates the 1999 monograph below and expands previous research by comparing fraud firms with similar no-fraud firms. The study finds that fraudulent financial reporting cases are becoming larger, are more likely to involve larger companies, are more likely to involve the CEO and/or CFO, and are more likely to involve the misstatement of revenues. Observable board governance characteristics do not differ meaningfully between fraud and no-fraud firms, suggesting the need for research on governance processes and interactions of governance characteristics. Fraud firms are more likely to change audit firms, and the consequences of fraud continue to be severe, with significant stock price declines and frequent bankruptcies, stock exchange delistings, and asset sales for fraud firms. Finally, the authors call for additional research to examine the effects of the Sarbanes-Oxley Act and Section 404.
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Ten years after its 1987 release of the
Report of the National Commission on Fraudulent Financial Reporting, COSO engaged in a research project to analyze occurrences of fraudulent financial reporting from 1987, through 1997. In 1999, COSO issued a monograph —
Fraudulent Financial Reporting: 1987-1997, An Analysis of U.S. Public Companies — that provided extensive descriptive information on the nature of those fraudulent acts, the individuals and entities involved, and numerous corporate governance-related factors. This monograph has subsequently influenced actions by regulators and standard-setters.
This report contains the summary of the analysis of fraudulent financial reporting conducted in the mid-1980s by the National Commission on Fraudulent Financial Reporting (known as the Treadway Commission) and its related recommendations of solutions to reduce the occurrence of such fraud. The report emphasized that the prevention and earlier detection of fraudulent financial reporting must start with the entity that prepares financial reports. The Commission's recommendations for increased deterrence also involved new SEC sanctions, greater criminal prosecution, improved regulation of the public accounting profession, adequate SEC resources, improved federal regulation of financial institutions, and improved oversight by state boards of accountancy. Recommendations also were made to standard-setters, including the AICPA’s Auditing Standards Board, to improve the effectiveness of the audit of financial statements. To encourage educational initiatives, the Commission also recommended changes in the business and accounting curricula as well as in professional certification examinations and continuing professional education. The report contained more than 150 recommendations.
Summary of Recommendations
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