Continuous improvement requires that you not only audit and monitor but also that you test your controls. In addition to the language set out in the 2012 FCPA Guidance, two of the seven compliance elements in the US Sentencing Guidelines call for companies to monitor, audit, and respond quickly to allegations of misconduct. Finally, under Prong 9 of the Evaluation of Corporate Compliance Programs, under the area of Control Testing, it asks the following question: What control testing has the company generally undertaken? Controls testing is key component enforcement officials look for when determining whether companies maintain adequate oversight of their compliance programs.
A review plan is an excellent tool for the compliance practitioner because it provides a method for the ongoing evaluation of policies and sets forth a manner to communicate and train on any changes that are implemented. More than simply staying current, this approach will help provide the dynamics that the DOJ continually talks about in keeping your program fresh. Lastly, such a review plan can also guide the compliance practitioner in creating an ongoing game plan for continuous improvement.
As the COSO 2013 Internal Controls Framework provides a roadmap to test your controls. This means that if you have a multi-country or business unit organization, you need to determine how your compliance internal controls are inter-related up and down the organization. The Illustrative Guide also realizes that smaller companies may have less formal structures in place throughout the organization. Your auditing can and should reflect this business reality. Finally, if your company relies heavily on technology for your compliance function, you can leverage that technology to “support the ongoing testing and evaluation” program going forward.
First are some general definitions that you need to consider in your evaluation. A compliance internal control must be both present and functioning. A control is present if the “components and relevant principles exist in the design and implementation of the system of [compliance] internal control to achieve the specified objective.” A compliance internal control is functioning if the “components and relevant principles continue to exist in the conduct of the system of [compliance] internal controls to achieve specified objectives.”
COSO suggests a four-pronged approach in your testing, which I have adapted for the compliance practitioner. (1) Make an overall test of your company’s controls. This should include an analysis of whether each control is present and functioning and they are operating together in an integrated manner. (2) There should be a control component evaluation to determine if any control deficiency is found you can move to see if there are any compensating controls. (3) Test whether each control furthers the legal or business requirement you are trying to meet and then determine if a deficiency exists, what is the severity of the deficiency. (4) Finally, you should summarize all your internal control deficiencies in a log so they are addressed on a structured basis for continued improvement.
Another way to think through testing could be to consider the controls to affect the principle and would allow internal control deficiencies to be noted along with an initial review of the control failure. The next step would be to roll up the results of the evaluations. Next would be a re-evaluation of the severity of any deficiency in the context of compensating controls. Lastly, an overall testing allows you to consider if the controls are operating together in an integrated manner. This type of process would then lend itself to an ongoing evaluation so that if business models, laws, regulations or other situations changed, you could test if your internal controls were up to the new situations or needed adjustment.
Under a compliance regime, you may be faced with known or relevant criteria to classify any deficiency. For example, if written policies do not have at a minimum the categories of policies laid out in the FCPA 2012 Guidance, this could be deemed a control failure (The Guidance states the following policies should exist: on “the nature and extent of transactions with foreign governments, including payments to foreign officials; use of third parties; gifts, travel, and entertainment expenses; charitable and political donations; and facilitating and expediting payments”).
If there are no objective criteria, as laid out in the FCPA 2012 Guidance, to evaluate your company’s compliance internal controls, what steps should you take? COSO suggests that a business’ senior management, with appropriate board oversight, “may establish objective criteria for evaluating internal control deficiencies and for how deficiencies should be reported to those responsible for achieving those objectives.” Together with appropriate auditing boundaries set by either established law, regulation or standard, or through management exercising its judgment, you can then make a full determination of “whether each of the components and relevant principles is present and functioning and components are operating together, and ultimately in concluding on the effectiveness of the entity’s system of internal control.” The key is to document the reasoning of the boundaries and then follow them.
This Document, Document, and Document feature is critical in any best practices anti-corruption or anti-bribery compliance program whether based upon the FCPA, UK Bribery Act or some other regulation. When the SEC comes knocking this is precisely the type of evidence they will be looking for to evaluate if your company has met its obligations under the both SOX 404 requirements and the FCPA’s internal controls provisions. Finally, it provides a way to continuously improve your controls.
Three Key Takeaways
- Testing of controls helps to provide reasonable assurance of achievement of the entity’s controls.
- There are two over-arching requirements for effective controls. First, each of the five components are present and function. Second, are the five components operating together in an integrated approach.
- For an anti-corruption compliance program, you can use the Tem Hallmarks of an Effective Compliance Program as your guide to test against.
For more information on how an independent monitor can help improve your company’s ethics and compliance program, visit this month’s sponsor Affiliated Monitors at www.affiliatedmonitors.com.