What Exactly are Accounting Controls?
Let’s all confess – let’s all tell the truth about one issue. Who can define in simple terms what “accounting controls” actually are? We all know what a bribe looks like and smells like. But when it comes to accounting controls, eyes glaze over, speakers mumble and speak quickly, typically turning to the next slide in a seminar presentation.
So let’s take a moment and try to define some concepts.
The FCPA’s accounting provisions apply only to issuers. The purpose of the accounting provisions is to detect and prevent violations of the anti-bribery provisions, but the accounting provisions apply to a broader range of conduct and may be violated despite lacking any connection to an improper payment or even if the wrongful act is not material.
The books and records provisions require every issuer to keep books, records, and accounts that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the issuer’s assets. A company may be liable if its records omit a transaction, such as a bribe, illegal commission, or other improper payment. Other types of violations include disguising records to conceal improper aspects and failing to identify the improper nature of an otherwise properly recorded transaction. The reasonableness required by the accounting provisions is defined as the level of detail and degree of assurance as would satisfy prudent officials in the conduct of their own affairs.
Issuers are also required to devise and maintain a system of internal accounting controls sufficient to provide reasonable assurances that (1) transactions are executed in accordance with management’s authorization; (2) transactions are recorded as necessary to permit preparation of financial statements in conformity with generally accepted accounting principles or any other applicable criteria, and to maintain accountability for assets; (3) access to assets is permitted only in accordance with management’s authorization; and (4) the recorded accountability for assets is compared with the existing assets at reasonable intervals and appropriate action is taken with respect to any differences.
Companies need a strong system of management and financial controls which is embedded in the company’s structure. Each and every component must include a compliance component which is coordinated among the various pieces of the system. The critical components of such a system include:
— Delegation of authority guides and review procedures for management and financial decisions
— A monitoring process for planning and performance measurements
— Controls for contracting practices and standards for entering into contracts
— Cash disbursement and cash receipts controls
— Banking procedures
— Procurement acquisition controls
— Capital budgets procedures
— Credit and collection procedures
— Project controls
— Financial accounting procedures and reporting guidelines
A critical player in the overall system is an independent internal audit office/program built on unrestricted access to financial records with reporting obligations to a corporate audit committee.
The control system must include a set of consistent policies, management accountability, required approval and review, training, continuous assessment, documentation and strict enforcement of policies and practices.
With these components, a company can truly certify that it has an adequate system of internal controls which are designed, among other things, to prevent bribery and other misconduct.
I'm interested to see if other readers have been looking at continuous auditing solutions? There are a few small companies that are looking to shake up the accounting world by letting the computer do real time monitoring of the accounting system.
At first I thought the big accounting firms would resist, but my research shows that this way they can shift some of the responsibility back to the client. And they are recognizing that you can't just throw more bodies at certain issues (like CDOs).
One could also setup rules for certain types of overseas payees, to help find possible warning signs.