Controls and Managing Enterprise-Wide Risks
to complying with the sweeping reforms in corporate governance
and financial reporting following the Sarbanes-Oxley Act,
companies can benefit further by adopting a broader view that
encompasses an enterprise-wide risk-management outlook. This
approach is especially applicable to section 404 of the Sarbanes-Oxley
Act, which deals with management’s assertion regarding
the effectiveness of its internal controls over financial
reporting. As companies work to comply with these new rules,
they can build their section 404 work into an opportunity
to address other aspects of risk throughout the organization,
including financial, legal, and operational.
emerging trend of evaluating and monitoring the range of
business risks—including those assessed in an internal
control review—may help companies simultaneously meet
strategic goals, boost shareholder and stakeholder value,
and focus on good governance.
the mandates of section 404 need not be an obstacle to implementing
an enterprise risk-management effort. Instead, the compliance
process can enable companies to focus on enterprise-wide
risks through a distributed evaluation—that is, a
self-assessment of risk and control. This evaluation assigns
responsibility for the assessment to those who are “closest
to the action”—in other words, those most directly
involved in the control over each process. Such an approach
can help companies achieve a better-balanced risk and control
wisdom formerly held that responsibility for internal controls
was delegated to an organization’s financial group.
According to current thinking, however, internal controls
are owned by those within the business who manage daily
operations and who depend on the controls for achieving
their goals. These control process owners are well prepared
to perform the distributed evaluation of identifying, evaluating,
and managing pertinent risks to assist the business in achieving
its financial goals. The Sarbanes-Oxley rules reinforce
the value of such risk-based evaluations.
a company looks ahead one year, how can it measure success
beyond mere compliance with regulatory requirements? For
multinational companies, one sign of success would be a
worldwide standardization of internal controls that allows
the organization to orient itself toward a widely accepted
set of control criteria, such as the Committee of Sponsoring
Organizations of the Treadway Commission (COSO) internal
control framework or the COSO enterprise risk- management
(ERM) framework issued in 2003. Coining a “controls
language” shared throughout the organization can help
a company take greatest advantage of its set of controls—deciding
which key controls to keep and which it can discard because
they do not add value or are otherwise unnecessary.
addition, companies may use the section 404 assertion rules
to help them achieve a company-wide transformation of business
processes. The internal-control assessment may produce several
Greater use of automated, or system-based, controls;
Better evaluation of process risks and mitigation of risk;
More uniform controls throughout the organization; and
Greater responsibility for controls assessment for the
compliance procedures can also be used to weed out nonessential
tasks and determine good practices within each business
Comparing controls between different business units, or
within a company’s operations in different countries;
Cutting the risk of error by using a more technology-based
method of control rather than manual processes;
Using key performance indicators to gauge the effectiveness
of a process across a span of risks and time periods;
Getting feedback from control procedures on a worldwide
basis, which can lead to better reporting capabilities.
examining their sets of controls, companies may find it
valuable and cost-effective to consider an automated system
rather than a manual review. The internal control assessment,
performed through an automated self-assessment, is more
than a simple questionnaire. It can gather information from
control owners about the status of key controls. The assessment
is based not on the frequency of the assertion but on the
type of control—automated or manual—and how
vulnerable to risk the controls may be.
an automated system for internal control assessment offers
several other advantages. It consolidates internal control
information and status, as well as being a repository of
all organizational risks and controls. The repository is
useful not only for section 404 reporting responsibilities
but also for any ERM initiatives.
of the Internal Auditor
internal auditor can play a vital role in linking internal
control reporting with ERM. The internal auditor can foster
an environment that allows the company to link the efficiencies
of an ERM approach to the overall business aims of the organization.
addition to articulating the linkage of internal control
reporting with ERM to senior management, the internal auditor
can perform a number of other important functions:
Helping control process owners gain a better understanding
of internal control assessment and testing.
Becoming a purveyor of best practices within the organization.
For example, if the internal auditor discovers that a
particular business segment has adopted a more efficient
approach to internal control reporting, she can share
that knowledge with other business segments.
Generally enhancing the organization’s understanding
of internal controls by imparting subject-matter knowledge
in this area.
Monitoring the organization’s internal controls
through testing and feedback on its control status.
the distributed evaluation, or risk assessment, is properly
assigned to the operations people with direct experience
in their respective areas, the overall risks that an organization
faces continue to be a corporate-governance priority for
the board of directors and management. To help them better
understand those risks, corporate leaders should consider
the following questions:
What types of analyses is the organization doing to identify
What is the organization doing to assess those risks and
find the best way to take advantage of or mitigate them?
response to the mandates and recommendations of Sarbanes-Oxley,
senior management may consider several other measures to
enhance corporate accountability:
Assessing self-knowledge and knowledge of others in the
Ensuring that a uniform process exists and is followed
by other members
of the organization that provides internal certification.
Assessing the impact of changes in the business that may
have an effect on internal controls; for example, acquisitions
or divestitures, and new accounting or SEC rules.
Obtaining formal internal management representation letters,
on a quarterly basis, from internal accounting personnel
for domestic and foreign subsidiaries.
Holding monthly or quarterly conference calls with accounting
staff (including worldwide operations) to review new accounting
pronouncements and other items that facilitate the closing
Initiating a formal regular meeting with key process owners
or segment leaders (including sales, purchasing, human
resources, and legal) to discuss activities that may influence
accounting and disclosure.
Harmonizing these measures with any ERM initiatives.
an ERM approach to the internal-control assessment process
has costs. It may be more costly, however, not to seize
the opportunity to implement this approach. The investment
Establishing a risk framework and common risk vocabulary;
Establishing and maintaining a chief risk officer or risk
Continued measuring and monitoring; and
Periodic updating of the risk assessment framework.
many companies, a phased-in approach is the most practical
way to deal with the cost issue. Initially, a company evaluates
only the risks and controls over financial reporting, but
it designs the evaluation tools and techniques so they can
support ERM. Once the evaluations required by Sarbanes-Oxley
are complete, the company can expand the assessment into
the operational and strategic realms, until a complete ERM
system is in place.
Farrell, CPA, is a partner in the internal audit
services practice of KPMG LLP, and is based in New York City.
He can be reached at 212-872-3047 or at email@example.com.