In its Framework Volume, COSO said, “Information is necessary for the entity to carry out internal control responsibilities to support the achievement of its objectives. Management obtains or generates and uses relevant and quality information from both internal and external sources to support the functioning of other components of internal control. Communication is the continual, iterative process of providing, sharing, and obtaining necessary information. Internal communication is how information is disseminated throughout the organization, flowing up, down, and across the entity. It enables personnel to receive a clear message from senior management that control responsibilities must be taken seriously. External communication is twofold: it enables inbound communication of relevant external information, and it provides information to external parties in response to requirements and expectations.”
However, as with the other components of the COSO Cube, the objective of Information and Communication is not to be taken in a vacuum. Indeed, one of the more interesting aspects of this objective is that it runs not only vertically but also horizontally. Rittenberg says that this objective “is not a one-way street: information needs to be generated at operational levels and communicated across and up the organization to enhance decision-making.” Moreover, he believes this means that while it may be the responsibility of more senior managers to have the requirement to develop, create and implement policies and procedures; they have to be communicated downward in the organization and there should be feedback back up the organization regarding this process. Finally, as Rittenberg continues, “information and communication must be fully integrated with the other components of the Framework, most especially those of monitoring and risk assessment.”
Information and Communication
The objective of Information and Communication consists of three principles. They are:
Principle 13 - “The organization obtains (or generates) and uses relevant, quality information to support the functioning of internal control.”
Principle 14 - “The organization internally communicates information, including objectives and responsibilities for internal control, necessary to support the functioning of internal control.”
Principle 15 - “The organization communicates with external parties regarding matters affecting the functioning of internal control.”
A White Paper, entitled “The Updated COSO Internal Control Framework”, emphasized the inter-related nature of the five objectives and that the 17 Principles are readily adaptable to compliance. I think they are more than simply adaptable as they provide a clear road map for the CCO or compliance practitioner on how to set up the right compliance controls. Finally, I believe that the SEC will measure your company’s internal controls against each of these 17 Principles and if you cannot map your internal controls to them and provide audit evidence, you may well in FCPA hot water.
The Framework Volume makes clear that this Principle relates to ‘relevant’ information and not simply reams and reams of data for data’s sake. Rittenberg said this Principle requires that “Relevant, timely and quality information needs to be assessed by management and others to help identify” several areas within a company. For the CCO or compliance practitioner this means that you need to identify relevant data, which can include both internal and external data. The hard part is to move that data to actionable information. Rittenberg also suggests that you need to consider the characteristics of the information and “whether or not such information is being used correctly and timely.” The Framework Volume goes on to detail several categories of both internal and external information which can be a good starting point to be used as sources from which management can generate “useful information to relevant internal controls.”
This is the Principle that brings the up and down and indeed horizontal action required for Information and Communication. Rittenberg notes it relates to how information is communicated internally but adds “it is equally important that such information be communicated to those with responsibilities over operation and compliance objectives, as well as reporting objectives.” Finally, he cautions that entities should assess whether there are any “gaps in the communication process”.
Therefore, under this Principle you will need to determine several different things from the compliance perspective. Does the Board communicate in a downward mechanism that gets its relevant instructions to the CCO or compliance function? Does the CCO or compliance function communicate upwards with the Board? Note that this Principle clearly reinforces an access component for the compliance function. But it also specifies the horizontal communication that I referred to above to ascertain that policies and procedures are effectively spread throughout an organization.
This Principle requires that a company communicate with relevant external parties. Rittenberg provides an excellent CCO or compliance practitioner example when he cites to the need for companies to communicate with third parties about relevant Codes of Conduct or similar documents, which might apply to them. He also pointed to the example of information about a hotline that could be provided to a third party to report any compliance related issues. But more than a company sharing its relevant compliance information with contracted third parties, whether they be on the sales side or in the supply chain, this Principle recognizes “that outside parties can provide information to management on the effectiveness of internal controls…and regulatory communication.”
Obviously there must be communications lines up and down from the Board but also within an organization for dissemination of the appropriate compliance related information. For this Principle, the CCO or compliance practitioner should also evaluate the communication lines to third parties. This communication can flow both ways, as noted, with compliance obligations to third parties but also information in the form of compliance issues back from third parties.
Information and Communication requires a wide range of information to go up and down the corporate chain. The article “3 Challenging Principles in COSO’s Framework: A Closer Look at Principles 2, 4 and 13” relates that “People who understand the objectives, risks and controls of the information flows necessary for accounting transactions and the preparation of financial statements are critical both on the side of management and the external auditor.” This may require reliance on those with technical skills far greater than management can bring to bear. Additionally, “organizations may want to consider creating an inventory of information requirements (both from internal and external sources), maintaining written data flow processes, implementing robust controls over spreadsheets, maintaining sound data repositories and instituting a data governance program. A data governance program will go a long way toward establishing and communicating the necessary pillars for [Information and Communication], including roles and responsibilities.” Fortunately for the CCO or compliance professional there is “no single recipe” for success so you can bring a wide range of talents, skills and imagination to bear on this objective.
Howell noted that “communication internally is how you establish the communications with your sales organization, with your sales operations? How do you establish communications with the legal organization? How do you establish information with the post-sales organizations? Even with the auditors, and your internal auditors and your external auditors and the board, to give the audit committee of the board comfort that the company has put in place the right levels of controls.
A final point on communications externally. In the compliance realm, your external communications fall towards your third parties because that is your greatest risk for bribery and corruption. Your third parties are either part of your sales side of the organization in the form of agents, distributors, resellers, et cetera, or on the supply chain side who are delivering a product yet, as part of the supply chain, they are helping you create and build your product or integrate into your service that you're going to deliver, that you're going to sell, that is going to be subject to review.
Three Key Takeaways
For more information on how to improve your internal controls management process, visit this month’s sponsor Workiva at workiva.com.