The control environment component of the COSO framework is critical as it sets the tone for the organization, influencing the control consciousness of its people. It is required by the Sarbanes-Oxley Act of 2002 to ensure top management commitment and a supporting organizational culture where policies and procedures are standardized. The control environment includes the integrity, ethical values, and competence of the company's people, as well as the way management assigns authority and responsibility, and organizes and develops its people. It provides discipline and structure as the foundation for all other components of internal control.
References:
* COSO (Committee of Sponsoring Organizations of the Treadway Commission) framework documentation.
* Sarbanes-Oxley Act of 2002, Sections 302 and 404.