Bridging the Gap: Uniting Compliance and Financial Controls (Part II of IV)

by Michael Volkov
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A Chief Compliance Officer has a number of important relationships to attend to in the corporate governance landscape. A critical relationship needed to “operationalize” a compliance program is a partnership between a CCO and the Chief Financial Officer and its key constituents, including the Internal Auditor and Comptroller.

Unfortunately, a recent survey (Here) revealed that only 37 percent of CFOs actively participate in their company’s anti-corruption compliance program.

That is a disappointing indicator of a serious compliance gap. CCOs have to work together and can leverage each other’s resources. If a CFO works in the silo of financial controls, Sarbanes-Oxley, and other financial systems, a CCO is by definition failing to meet the effectiveness standard. It is easy to understand why this is the inevitable result.

Let’s consider some basic financial coordination requirements. If payments are made to third parties, vendors and suppliers without appropriate controls to ensure proper payments are made pursuant to a contract, a valid invoice for services rendered, and to an account confirmed in the name or the third party, supplier or vendor, the company could easily experience a corrupt scheme to extract money and use third parties, vendors and suppliers to make illegal bribery payments to government officials.

Additionally, if the financial controls for reimbursement for gifts, meals, entertainment and travel expenses did not include appropriate compliance requirements for authorization, documentation and confirmation, the company is at risk for bribery schemes involving inappropriate gifts, meals, entertainment and travel money.

In this respect, the accounts payable function plays a critical role in monitoring and identifying potential compliance violations – an accounts payable staff member is the front line of defense for noticing inappropriate fees in an invoice, unexplained services or other documentation failures when reviewing invoices from third parties, vendors and suppliers, as well as reimbursing employees for gifts, meals, entertainment and travel expenses..

Remember, the land of financial controls is defined by “materiality” – transactions and controls that could result in a material weakness in the financial reporting systems. Money used to further a bribery scheme can be secured through multiple non-material transactions, requiring CFOs to administer and coordinate with CCOs to identify and investigate such transactions for corruption risks. When a CFO works with blinders, they are by definition ignoring significant corruption risks.

Bringing these operations together should not be very hard. The Internal Auditor, who reports to the CFO, is a natural partner for CCOs. In every organization, you should expect that the CCO and Internal Auditor work closely together given their naturally aligned objectives – to ensure overall compliance with internal controls, including the company’s compliance program.

A CFO, however, cannot delegate the responsibility for the company’s financial controls to the Internal Auditor. Instead, the CFO has to work with the CCO to ensure that financial controls are designed around compliance program elements and needs. A CFO who fails to do this is creating a serious financial risk to the company.

As I have written recently, CFOs need to come down from Mt. Olympus and bring their scribes to begin work on drafting and coordinating in the design of financial controls to include appropriate compliance controls needed to ensure that money is authorized for legitimate purposes to ensure bribery schemes do not occur and that books and records are accurately maintained.

Given the stakes, CFOs can bring about change to their profession – they will find a warm welcome from CCOs throughout the corporate governance world.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

© Michael Volkov, The Volkov Law Group | Attorney Advertising

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