COSO Principle 3: Management establishes, with board oversight, structures, reporting lines, and appropriate authorities and responsibilities

To meet the coso principle 3: management establishes, with board oversight, structures, reporting lines, and appropriate authorities and responsibilities requirement, you must document who owns which control decisions, how they report, and how the board (or equivalent governing body) oversees the control environment, then retain evidence that this governance model operates consistently. Auditors will look for clear accountability, escalation paths, and proof the structure is used in practice.

Key takeaways:

• Define and approve an operating model: org structure, reporting lines, decision rights, and delegated authority for control matters.
• Prove board oversight: recurring agendas, minutes, and actions tied to risk and control responsibilities.
• Make it auditable: role descriptions, RACI matrices, and operating evidence that aligns to SOC 2 scope.

COSO Principle 3 sits in the “Control Environment” domain of the AICPA Trust Services Criteria used for SOC 2 examinations. It is a governance requirement, not a technical one. If your program has good security controls but unclear ownership, weak escalation paths, or no board visibility, auditors will still flag exceptions because the system of internal control lacks defined accountability.

For a Compliance Officer, CCO, or GRC lead, the fastest path to operationalizing this principle is to treat it like an “organizational control”: document the structure that governs control decisions, map responsibilities to named roles (not just teams), and show that oversight occurs on a predictable cadence with recorded outcomes. In practice, this includes an approved org chart for in-scope functions, role descriptions for control owners, a RACI for key compliance and security processes, and a board (or board-delegated committee) mechanism that receives reporting and makes/ratifies key decisions.

This page gives requirement-level guidance for implementing COSO Principle 3 in a SOC 2 context, with artifacts and operating evidence that stand up in an audit, plus a practical execution plan you can run immediately.

Regulatory text

Requirement (SOC 2 / Trust Services Criteria): “COSO Principle 3: Management establishes, with board oversight, structures, reporting lines, and appropriate authorities and responsibilities.” ¹

Operator interpretation (plain English)

You need an org and governance model where:

• People know who is accountable for controls and risk decisions.
• Reporting lines make sense for independence and escalation (for example, security and compliance risks can reach executives and the board without being blocked by conflicting incentives).
• Authority is explicit: who can approve policies, accept risk, sign off on exceptions, and enforce remediation.
• The board oversees: it receives relevant reporting, asks questions, and directs or validates management actions.

Auditors usually fail organizations here for one of two reasons: (1) the structure exists informally but is not documented, or (2) the structure is documented but you cannot show it operated during the audit period.

Who it applies to

In-scope entities

• Service organizations pursuing a SOC 2 report under the AICPA Trust Services Criteria. ¹

Where it shows up operationally

This requirement touches any function that influences SOC 2 commitments and system operation, typically:

• Security (CISO / Head of Security), IT/Infrastructure, Engineering
• Compliance/GRC, Risk, Legal/Privacy
• HR (for role definitions, onboarding/offboarding authority)
• Customer support / Operations (incident intake, escalations)
• Finance/Procurement (third-party spend and contracting authority)
• Executive leadership and board or board-delegated committee (audit committee, risk committee, or equivalent)

If you have a small company without a formal board, you still need governing-body oversight. In SOC 2 terms, the auditor will expect an equivalent oversight mechanism and evidence that it functions.

What you actually need to do (step-by-step)

Step 1: Define the “in-scope governance perimeter”

1. Confirm which products/systems are in SOC 2 scope.
2. List teams that design, operate, or oversee those systems (security, engineering, IT, support, etc.).
3. Identify key decisions that affect controls: policy approval, risk acceptance, access approval, incident declaration, vendor/third-party onboarding, change approvals.

Output: SOC 2 scope statement annotated with “governance-impacting functions.”

Step 2: Document structures and reporting lines (make it audit-ready)

Create a concise governance packet that includes:

• Org chart covering in-scope functions with named leadership roles.
• Reporting lines that show who reports to whom, including dotted-line relationships (e.g., security’s escalation path to exec leadership).
• Committee structure (security steering committee, risk committee, change advisory board, etc.) with membership and decision authority.

Operator standard: Name roles, not just departments. “Engineering” is not accountable; “VP Engineering” (or equivalent) is.

Step 3: Assign authorities and responsibilities with decision rights

Build a responsibility model for control-relevant processes:

• Policy management (who drafts, reviews, approves)
• Risk management (who identifies, assesses, accepts, tracks)
• Incident management (who declares severity, who notifies customers, who closes)
• Access management (who approves privileged access, who reviews access)
• Change management (who can approve emergency changes)
• Third-party risk (who approves onboarding, who owns ongoing monitoring)

Use a RACI (Responsible, Accountable, Consulted, Informed) or equivalent decision-rights matrix. Ensure every key process has exactly one Accountable role.

Step 4: Formalize board oversight and reporting

Define and document:

• Which board/committee receives security, compliance, and risk reporting.
• What gets reported (risk register themes, incidents, control exceptions, remediation status).
• How decisions are recorded (minutes, resolutions, action items).

Then operationalize it:

• Add standing agenda items.
• Schedule recurring reporting.
• Record actions taken (approvals, requests for remediation, accepted risk).

Step 5: Tie governance to day-to-day control operation

Auditors will test whether people follow the structure you documented. Align operational workflows so they route approvals and escalations correctly:

• Ticketing/workflow tools: map approvals to the accountable role.
• Policy exception process: requires sign-off by the defined authority.
• Incident postmortems: distributed to the defined oversight group.
• Third-party onboarding: procurement cannot complete onboarding without the required compliance/security sign-offs.

Step 6: Build the evidence plan (design + operating effectiveness)

For SOC 2, you need evidence across the audit period that the governance model ran. Create an “evidence map” that lists each meeting, artifact, and approval record you will retain, then assign an owner to collect it monthly.

Daydream (as a practical mechanism) fits here when you need a single place to map SOC 2 requirements to governance artifacts, assign owners, and collect operating evidence on a cadence without chasing screenshots at the end of the period.

Required evidence and artifacts to retain

Keep evidence in a controlled repository with version history. Typical auditor-ready artifacts for Principle 3 include:

Governance design artifacts (static or versioned)

• Org chart for in-scope functions (dated/versioned)
• Role descriptions for key control owners (CISO/Head of Security, GRC lead, IT admin, incident commander, etc.)
• RACI matrix for control-relevant processes
• Delegation of authority (DoA) or approval matrix (policy approvals, risk acceptance, contract approval thresholds if applicable)
• Committee charters (security steering committee, risk committee, CAB), including purpose and decision rights

Operating evidence (time-bound, shows it ran)

• Board/committee agendas and minutes showing oversight topics and decisions
• Management risk/control reporting packs provided to board/committee
• Action item logs with owners and closure evidence
• Examples of approvals taken by the correct authority (policy approvals, exceptions, risk acceptances)
• Incident records showing escalation followed documented reporting lines (for incidents in period)
• Evidence of periodic review/refresh of org/RACI/committee membership when changes occur

Common exam/audit questions and hangups

Auditors commonly ask:

• “Show us the org structure for the SOC 2 system and who owns security and compliance decisions.”
• “Who has authority to approve policies and exceptions? Provide examples from the audit period.”
• “How does the board oversee the control environment? Provide agendas/minutes and the materials management presented.”
• “What happens when security disagrees with engineering priorities? Show the escalation path and a real example.”
• “When leadership changes occurred, how did responsibilities transition?”

Hangups that create SOC 2 findings:

• The “board oversight” claim is unsupported by minutes or reporting packs.
• A RACI exists but is generic, outdated, or missing accountability for key processes.
• Independence issues: the same role both implements and self-approves critical controls without review.
• Informal governance: decisions happen in chat without approval records.

Frequent implementation mistakes and how to avoid them

Mistake	Why it fails	Fix
Treating this as “just an org chart”	Auditors need decision rights and evidence of operation	Add RACI + delegated authorities + operating evidence
Using team names instead of roles/people	Accountability becomes ambiguous	Assign Accountable roles and name role owners
No documented escalation path	Control disputes stall, incidents escalate poorly	Write an escalation ladder and test it in tabletop exercises
Board oversight is aspirational	SOC 2 requires demonstrable oversight	Create a recurring board/committee reporting cadence and retain minutes
Governance artifacts are stale after reorg	Auditor tests the period under review	Add a change trigger: reorg requires governance packet update

Enforcement context and risk implications

No public enforcement cases were provided in the source catalog for this requirement. In a SOC 2 context, the practical risk is not a regulator fine tied directly to Principle 3; it is a qualified SOC 2 opinion, control exceptions, or report delays if governance is unclear or cannot be evidenced. That risk becomes commercial quickly: customers may require a clean SOC 2 report, and procurement cycles can stall when your report has exceptions tied to control environment weaknesses. ¹

Practical 30/60/90-day execution plan

First 30 days: establish and document the governance baseline

• Confirm SOC 2 scope and list in-scope governance functions.
• Draft governance packet: org chart, reporting lines, committees, and decision-rights inventory.
• Build the initial RACI for key processes (policy, risk, incident, access, change, third party).
• Identify board/committee oversight forum and define the reporting template (risk/control dashboard outline).

Deliverables: Governance packet v1, RACI v1, oversight reporting template, evidence map with owners.

Days 31–60: operationalize approvals and oversight

• Publish role responsibilities and decision rights; socialize with leadership.
• Stand up or formalize the oversight cadence (committee meetings with agendas/minutes).
• Route workflows through the defined authorities (policy approvals, exceptions, risk acceptances).
• Start monthly evidence collection and spot-check completeness.

Deliverables: First two cycles of committee minutes + reporting packs, examples of approvals/exception records, evidence repository structure.

Days 61–90: prove operating effectiveness and harden for audit

• Run a governance effectiveness review: test whether escalations and approvals match documented lines.
• Fix gaps: update RACI, clarify authority conflicts, add alternates for key roles.
• Prepare the auditor walkthrough package: map artifacts to COSO Principle 3 and show operating evidence across the period.
• If using Daydream, configure recurring tasks for evidence capture, owner attestations, and board packet retention.

Deliverables: Auditor-ready mapping, curated evidence set, governance packet v2 reflecting real operation.

Frequently Asked Questions

We’re a startup without a formal board. How do we meet “board oversight”?

Use an equivalent governing body such as an executive committee or independent advisor group, and document its oversight role. Provide agendas, minutes, and the reporting management delivered as operating evidence. ¹

Do we need separate committees (risk committee, security committee, CAB)?

No specific committee names are required, but you do need defined structures and decision rights. Keep it minimal: one oversight forum plus a change/incident decision forum is often enough if responsibilities are clear and evidenced. ¹

What’s the minimum evidence auditors accept for “structures and reporting lines”?

An org chart and role responsibilities help, but auditors usually expect proof of use: approvals, escalations, and meeting minutes tied to risk and control decisions. The evidence must align to your SOC 2 scope. ¹

How granular should the RACI be?

Focus on processes that drive SOC 2 control operation: access, change, incidents, risk acceptance, policy management, and third-party onboarding/monitoring. Avoid a massive RACI that no one maintains; keep it tied to real workflows. ¹

Our security team reports into engineering. Will that fail SOC 2?

Not automatically, but auditors will look for an escalation path and oversight that prevents conflicts from blocking risk decisions. Document the path to executive leadership and show evidence it works (for example, risk acceptance sign-offs outside engineering). ¹

How do we handle shared responsibility with third parties (cloud providers, MSPs)?

Define internal ownership for managing the third party relationship, including who reviews SOC reports, tracks issues, and approves onboarding and renewals. Your reporting lines and authority matrix should reflect who can accept third-party risk on behalf of the company. ¹

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• 2025 SEC Marketing Rule Examination Focus Areas
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• Access control and identity discipline
• Access control management

Footnotes

1. AICPA TSC 2017