Due to several significant frauds, including Equity Funding, the Committee of Sponsoring Organizations (COSO) was created in 1985. The Committee was chaired by James C. Treadway, Jr. and is often referred to as the Treadway Committee. The objectives of the committee were as follows: 1. Determine the extent of fraud Conclusion: The Committee was unable to determine the extent of the fraud because no one knows how much fraud has not been discovered. 2. Identify the consequences Conclusion: The Committee recognized that fraud had a ripple effect. As a ripple, effect it impacts the fraudster, their family, the shareholders, creditors, and potential investors. 3. Identify the causal factors Conclusion: Fraud is a societal issue. 4. Identify the steps to reduce fraud Conclusion: The primary step is the establishment of the Tone at the top. See below for the recommendations. In October 1987, COSO published Report of the National Commission on Froudulent Financial Reporting (NCFFR). The report includes 49 recommendations for the following: Public Companies External Auditors Securities Exchange Commission (SEC), regulatory, and legal environment Education Universities should teach critical analysis and analytics. The most significant recommendation was to establish a language of internal control. This recommendation led to the creation of a report in 1992 entitled Internal Control an integrated Framework. This report is often referred to as COSO. The coso report did not have a significant impact until the passage of Sarbanes Oxley (SOX) in 2002, which required a control criteria for reporting on the internal controls over the financial reporting process. COSO Timeline Equity Funding Tone at the Top Before Frauds 1987 FCPA SEC 1987 National Commission on (COSO) Fraudulent Financial Reporting7 Recommended 1992 Internal Control- (COSO) Integrated Framework 2004 Enterprise Risk Management +(COSO) (COSO launches a project to update ERM Framework) Complements 2013 Internal Control- (COSO) Integrated Framework -Supersedes 2017 Enterprise Risk Management (COSO) Integrating with Strategy and Performance -Supersedes Next? Internal Control- Integrated Framework Figure 3: COSO Timeline The NCFFR emphasized the Tone at the Top as the primary control to address fraud. The Tone at the Top is typically created by the Chief Executive Officer (CEO). One of the key roles of the Board is to determine that the CEO establishes the right tone that will permeate throughout the organization. According to the NCFFR: To set the right tone, top management must identify and assess the factors that could lead to fraudulent financial reporting; all public companies should maintain internal controls that provide reasonable assurance that fraudulent financial reporting will be prevented or subject to early detection - this is a broader concept than internal accounting controls and all public companies should develop and enforce effective, written codes of corporate conduct. As a part of its ongoing assessment of the effectiveness of internal controls, a company's audit committee should annually review the program that management establishes to monitor compliance with the code. Question 1 How would you describe the Tone at the Top tone-at-the-top at Equity Funding