Final answer:
According to COSO, a strong internal control environment that strengthens financial reporting starts with the tone at the top, emphasizing the importance of leadership in promoting good financial practices and ethical behavior. The board of directors and auditing firms play pivotal roles in corporate governance, while outside investors provide additional oversight. The Lehman Brothers case exemplifies a failure in corporate governance systems, highlighting the necessity for robust controls.
Step-by-step explanation:
According to COSO, a strong internal control environment that strengthens financial reporting starts with the tone at the top. This assertion underlines the importance of a company's management in setting the right example and creating a culture that emphasizes the importance of internal controls and ethical financial reporting. The board of directors, who are elected by the shareholders, play a crucial role in corporate governance and are tasked with the oversight of top executives, making sure that the company's management upholds integrity and accountability in its financial reporting.
Furthermore, another key component of an effective internal control system is the role of the auditing firm. This external entity reviews the company's financial records to provide assurances that the reported financial status is fair and reasonable. In contrast to external auditors, internal auditors work within the company and are often given direct and unrestricted access to carry out their oversight role effectively. This collaboration contributes to a comprehensive audit function that can bolster an organization's financial accuracy and reliability.
Corporate governance may also involve outside investors, especially large shareholders such as mutual fund or pension fund managers. They represent a form of external oversight, ensuring that corporate governance structures are working effectively. However, as demonstrated in historical cases like Lehman Brothers, these systems can fail, leading to the dissemination of inaccurate financial information. Internal controls and effective corporate governance are essential in preventing such failures and protecting the interests of all stakeholders.