The basic framework for internal controls is derived from the COSO Model developed by the Committee of Sponsoring Organizations of the Treadway Commission in 1992 (COSO). This model has become the standard for an internal control framework and provides a structure to ensure companies address the key elements that should result in an effective system of internal controls. Using the COSO Model, as modified in 2013, provides a very supportable approach when regulators challenge whether a company has effective internal controls. The COSO Model defines internal controls in a pyramid, from bottom to top, as follows: (a) Control environment, (b) Risk assessment, (c) Control activities, (d) Information and communication, and (e) Monitoring.
Which internal controls does a company need to institute? Each company defines its internal controls to fit its business by determining what the Company wishes to protect and what type of control environment does it want to have in place. This means that they can be less formal in smaller companies but still effective if the focus is on the right risks. For anti-corruption risks, the most common control needs have been identified as follows: (i) Dealings with third parties; (ii) Gifts and entertainment, and (iii) Charitable donations. Yet even within those categories, a wide range of risks exists, depending on a company’s business practices. A Top Down ‘Check-the-box’ generic set of policies will not likely result in effective controls.
The process to determine which internal controls are needed will be of some familiarity to the compliance professional. It all starts with a risk assessment to establish the corporate policies which are applicable, tailored to the company, and sufficiently specific. The risk assessment will also help to identify the types of transactions across the company which should be addressed (gifts and entertainment, maintenance of bank accounts and movement of cash, dealings with third parties, etc.). The next step is to prepare a set of documents which define the control objectives to be in place for each type of transaction – example: Controls will be in place to ensure no vendor has been added to the vendor master file until complete due diligence has been completed and the vendor has been approved in accordance with Corporate policies. Thereafter, you need to document how the controls will be performed and how they will be evidenced and then incorporate the control procedures into applicable work instructions and job descriptions.
Each business location, determine the specific controls needed to accomplish each control objective. In many companies, a disparity of operating practices and accounting systems will result in different controls being needed. While this assignment may seem overwhelming it can be done in reasonable stages, pursuant to a specific implementation plan - it does not have to be done all at once for the entire company.
Internal controls for a Board or Board Compliance Committee should be broken down into five concepts:
Three Key Takeaways