Compliance Evangelist

COSO was adopted in 1992 as a framework for basis to design and then test the effectiveness of internal controls. In 2010, it was deemed necessary to update this framework, to provide a more supportable approach when adversarial third parties challenged whether a company has effective internal controls (such as the SEC). While the COSO 2013 Internal Controls Framework is designed for financial controls, I believe that the SEC will use this to review a company’s compliance internal controls. Over this five-part series, I will be exploring the five COSO Objectives and how they relate to best practices compliance program. Today, I take up Objective II, Risk Assessments.

The COSO 2013 Internal Controls Framework defines internal controls, from bottom to top, with the following Objectives: a) Control Environment, b) Risk Assessment, c) Control Activities, d) Information and Communication, and e) Monitoring. With the addition of those specific objectives, the COSO 2013 Internal Controls Framework now specifically provides controls to address compliance with laws and regulations. Every compliance professional needs to understand what is required under the COSO 2013 Internal Controls Framework and can show adherence to it or justify an exception if you receive a letter from the SEC asking for evidence of your company’s compliance with the internal controls provisions of the FCPA.

Objective II is designed to provide a company with a “dynamic and iterative process for identifying and assessing risks.” For the compliance practitioner, none of this will sound new or even insightful, however the Framework requires a component of management input and oversight that was perhaps not as well understood. The Framework Volume notes, “Management specifies objectives within the category relating to operations, reporting and compliance with such clarity to be able to identify and analyze risks to those objectives.” But management’s role continues throughout the process as it must consider both internal and external changes which can affect or change risk “that may render internal controls ineffective.” This final requirement is also important for any anti-corruption compliance internal control. Changes are coming quite quickly in the realm of anti-corruption laws and their enforcement. Management needs to be cognizant of these changes and changes that its business model may make in the delivery of goods or services which could increase risk of running afoul of these laws.

The objective of Risk Assessment consists of four principles.

Principle 6: Suitable objectives. Your risk analysis should always relate to stated objectives. As noted in the Framework Volume, it is management who is responsible for setting the objectives. Rittenberg explained, “Too often, an organization starts with a list of risks instead of considering what objectives are threatened by the risk, and then what control activities or other actions it needs to take.” In other words, your objectives should form the basis on which your risk assessments are approached.

Principle 7: Identifies and analyzes risk. Risk identification should be an ongoing process. While it should begin at senior management, Rittenberg believes that even though a risk assessment may originate at the top of an organization or even in an operating function, “the key is that an overall process exists to determine how risks are identified and managed across the entity.” You need to avoid siloed risks at all costs. The Framework Volume cautions “Risk identification must be comprehensive.”

Principle 8: Fraud risk. Every compliance practitioner should understand that fraud exists in every organization. Moreover, the monies that must be generated to pay bribes can come from what may be characterized as traditional fraud schemes, such as employee expense accounts, fraudulent third party contracting and payments and even fraudulent over-charging and pocketing of the differences in sales price. This means that it should be considered as an important risk analysis. It is important that any company follow the flow of money and if the Fraud Triangle is present, management be placed around such risk.

Principle 9: Identifies and analyzes significant change. It really is true that if there is one constant in business, it is that there will always be change. The Framework Volume states, “every entity will require a process to identify and assess those internal and external factors that significantly affect its ability to achieve its objectives.” Rittenberg intones that companies “should have a formal process to identify significant changes, both internal and external, and assess the risks and approaches to mitigate the risk” in a timely manner.

Discussion. The SEC has made it clear that companies should be expanding their view of risk in implementing the COSO 2013 Internal Controls Framework. Obviously, risk assessments are a cornerstone of a best practices compliance program as laid out in the 2020 FCPA Resource Guide and in the DOJ’s Evaluation. The regulators are telling companies specifically that they should be seeing new risks that they need address because of the changes brought about by the new standard.

Join us tomorrow for Objective III, Control Objectives. For more detailed information about the COSO Framework specifically and internal controls more generally, check out The Compliance Handbook, 2ndedition which is available for presale purchase. Use the code FOX25 and go hereThe Compliance Handbook 2nd edition will be available in both print and eBook editions.

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