The Integrated Framework (Framework Volume) recognizes that “every entity faces a variety of risks from external and internal sources.” This objective 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 COSO Framework requires a component of management input and oversight that was perhaps not as well understood. The Framework Volume says that “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 effect 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.
I. Objective-Risk Assessment
The objective of Risk Assessment consists of four principles. They are:
Principle 6 - “The organization specifies objectives with sufficient clarity to enable the identification and assessment of risks relating to the objectives.”
Principle 7 - “The organization identifies risks to the achievement of its objectives across the entity and analyzes risks as a basis for determining how the risks should be managed.”
Principle 8 - “The organization considers the potential for fraud in assessment risks to the achievement of objectives.”
Principle 9 - “The organization identifies and assesses changes that could significantly impact the system of internal control.”
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.
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 that “Risk identification must be comprehensive.”
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 account fraud, 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.
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.
The SEC has made it clear that companies should be expanding their view of risk in implementing the COSO 2013 Framework. Obviously risk assessments are a cornerstone of a best practices compliance program as laid out in the 2012 FCPA Guidance and in the DOJ’s Evaluatoin of Corporate Compliance Programs, issued in February 2017. 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.
Howell noted that “in the internal control arena, fraud risk in particular is something that has been keen interest because of the opportunity to mask fraud through the judgments made in recognizing revenue, no matter what the revenue recognition standard.” He went on to add other risks that companies should be considering in their risk assessments; “One risk is a company's business practices do not relate to the accounting that they are providing right now because the business practices are changing and internally the company is not recognizing that the business practices are changing.”
Another example is that sales folks are giving concessions to customers that are not being reflected in their understanding of the contract and the accounting for the contract.” Howell went on to add might be other activities that are going on to acquire contracts that aren't being properly accounted for or even recognized at some level. That the concessions are being given at the backend for return that aren't being reported back into the process of how does that affect the estimate of cheap revenue going forward.
Finally, risks that a company has misstated or underestimated, require a determine if revenue should be recognized over a period of time or estimated what that period of time is to recognize the revenue if it is a rolling time frame Howell stated, “For example, the period of time could be longer which means that your revenue would recognized over a longer period of time. There's always the risks that revenue could be recognized too early and that cost could be pushed out and spread over too long of a period of time. As we begin to think about these new judgments that are required, you get into this entirely new level of judgment and risk related to the judgment that the companies need to identify and build both preventative controls and detective controls, and have a plan to respond if they discover that the risk has actually happened and they have a failure.”
Three Key Takeaways
For more information on how to improve your internal controls management process, visit this month’s sponsor Workiva at workiva.com.