What specifically are internal controls in a compliance program? The starting point is the FCPA itself, which requires issuers to devise and maintain a system of internal controls that can reasonably assure:
- Transactions are executed in accordance with management’s general or specific authorization;
- Transactions are recorded as necessary (I) to permit preparation of financial statements in conformity with generally accepted accounting principles or any other criteria applicable to such statements, and (II) to maintain accountability for assets;
- Access to assets is permitted only in accordance with management’s general or specific authorization; and
- The recorded accountability for assets is compared with the existing assets at reasonable intervals and appropriate action is taken with respect to any differences.
The DOJ and SEC, in the 2012 FCPA Guidance, stated:
Internal controls over financial reporting are the processes used by companies to provide reasonable assurances regarding the reliability of financial reporting and the preparation of financial statements. They include various components, such as: a control environment that covers the tone set by the organization regarding integrity and ethics; risk assessments; control activities that cover policies and procedures designed to ensure that management directives are carried out (e.g., approvals, authorizations, reconciliations, and segregation of duties); information and communication; and monitoring. … The design of a company’s internal controls must take into account the operational realities and risks attendant to the company’s business, such as: the nature of its products or services; how the products or services get to market; the nature of its work force; the degree of regulation; the extent of its government interaction; and the degree to which it has operations in countries with a high risk of corruption.
Three key takeaways:
- Effective internal controls are required under the FCPA.
- Internal controls are a critical part of any best practices compliance program.
- There are four significant controls for the compliance practitioner to implement initially. (a) Delegation of authority (DOA); (b) Maintenance of the vendor master file; (c) Contracts with third parties; and (d) Movement of cash/currency.