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SASB and accounting body explore ESG links with Treadway corporate fraud framework

How sustainability links with long-established ‘COSO’ anti-corporate fraud body

The Institute of Management Accountants (IMA) and the Sustainability Accounting Standards Board (SASB) are to release a study looking at the integration of sustainability data within the framework of the so-called ‘Treadway Commission’, the long-established US anti-corporate fraud body.

Treadway is the unofficial name of the Committee of Sponsoring Organizations of the Treadway Commission on financial reporting, or COSO. It dates back to the 1980s and was set up by five professional bodies; its first chair was former SEC Commissioner James Treadway.

The institute, a US-based global accountancy body with 90,000 members, and SASB are focusing on eight case studies, among which is the California State Teachers’ Retirement System (CalSTRS).

Jeff Thomson, the IMA’s chief executive and co-author of the study, explained to RI that one of the five COSO framework’s components is the control environment, which includes the ‘tone at the top’ and the board’s oversight responsibility.

“We make the point in the paper that integrated governance is necessary for ESG to be successful. That means having in place a board educated on sustainability matters prepared to ask the right questions around both financial and non-financial reporting.”

About the rationale behind the study, Thomson added: “Investors would like to know that there has been a control process around these data.”

“If we are going to be developing an internal controls design over financial reporting, why don’t we have the same people doing it on non-financial reporting, which has lower levels of assurance and more likely inaccuracies?”The first COSO framework was launched as early as 1992. When the accounting scandals of Enron, Tyco and WorldCom broke in the early noughties, COSO’s framework was rediscovered as the top-down risk assessment tool of choice to meet the requirements of the Sarbanes-Oxley Act (SOX), in particular internal controls on financial reporting.

Alex Eng, Chair of IMA’s Global Board of Directors and Vice-president US Corporate Finance at EDF Renewable Energy, told RI that the COSO frameworks are not “binding but very persuasive” given their level of adoption.

“With the evolution of SOX and the Dodd-Frank Act, there has been increasing pressure on boards to hold leadership management accountable for implementing controls and COSO has been the generally accepted governance principle,” Eng said.

Thomson added that there is an explicit connection between internal controls and good corporate governance. “COSO arguably needs to do a better job at branding, I know you [in the UK] think of COSO and don’t necessary think of governance and strategy, but risk and control are very much connected to governance.”

In addition, COSO will publish this year an updated version of its other framework enterprise risk management first launched in 2004.

In April COSO signed a memorandum of understanding with the World Business Council for Sustainable Development (WBCSD) under which they would work together to help businesses identify and prioritize issues related to sustainability and enterprise risk management.