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23 May 2023

The Role of the Chief Risk Officer (CRO): Identifying and Mitigating Corporate Risks

Categories Sarbanes–Oxley Act


Chief Risk Officer Definition, Common Threats Monitored

What Is a Chief Risk Officer (CRO)? A chief risk officer is a corporate executive responsible for identifying, analyzing, and mitigating internal and external risks. The chief risk officer works to ensure that the company complies with government regulations, such as the Sarbanes-Oxley Act, and reviews factors that could hurt investments or a company’s business units. CROs typically have post-graduate education with more than 20 years of experience in accounting, economics, legal, or actuarial backgrounds. They are also referred to as chief risk management officers (CRMOs).

KEY TAKEAWAYS

  • A chief risk officer (CRO) is an executive in charge of managing risks to the company.
  • It is a senior position that requires years of prior relevant experience.
  • The role of the chief risk officer is constantly evolving as technologies and business practices change.

Understanding the Chief Risk Officer (CRO) The position of chief risk officer is constantly evolving. As companies adopt new technologies, the CRO must govern information security, protect against fraud, and guard intellectual property. By developing internal controls and overseeing internal audits, threats from within a company can be identified before they result in regulatory action.

Risks CROs Must Watch For The types of threats the CRO usually keeps watch for can be grouped into regulatory, competitive, and technical categories. As noted, companies must ensure they are in compliance with regulatory rules and fulfilling their obligations on reporting accurately to government agencies.

CROs must also check for procedural issues within their companies that may create exposure to a threat or liability. For example, if a company handles sensitive data from a third party, such as personal health information, there may be layers of security that the company is required to maintain to ensure that data is kept confidential. Some key considerations include:

  1. Compliance with Data Security:
    • Ensuring appropriate security measures for handling sensitive data.
    • Addressing lapses in security and unauthorized access to sensitive information.
    • Mitigating competitive risks associated with unauthorized access to sensitive data.
  2. Safety and Health:
    • Assessing risks to employees working in areas with potential threats.
    • Developing action plans to ensure the safety of personnel.
    • Complying with mandated procedures, including possible evacuations.

By effectively monitoring and addressing these risks, the CRO plays a critical role in safeguarding the company’s interests and maintaining regulatory compliance.

Additional Resources:

Websites and Online Resources:

  1. Risk Management Association (RMA): Offers resources, publications, and educational materials related to risk management practices. Visit Website
  2. Association for Financial Professionals (AFP): Provides insights, articles, and webinars on risk management and the role of the chief risk officer. Visit Website

Books:

  1. “The Risk Management Process: Business Strategy and Tactics” by Christopher L. Culp: Provides a comprehensive overview of risk management principles and practices. View Book
  2. “Implementing Enterprise Risk Management: Case Studies and Best Practices” by John Fraser and Betty Simkins: Explores real-world examples and best practices for implementing risk management frameworks. View Book

Academic Journals and Research Papers:

  1. “The Role and Impact of the Chief Risk Officer: A Literature Review” by Jiří Strouhal and Eva Vávrová: Analyzes the evolving role of the CRO and its impact on risk management practices. Read Paper
  2. “The Chief Risk Officer and Corporate Policy Effectiveness” by Renée M. Dailey: Examines the relationship between the CRO’s presence and the effectiveness of corporate risk policies. Read Paper

Reports and Studies:

  1. Deloitte’s “The Chief Risk Officer: Powering Risk Management in the Face of Uncertainty” Report: Provides insights into the evolving role of the CRO and effective risk management strategies. Access Report
  2. PwC’s “Rethinking Risk Culture: How to Embed Risk Culture in Financial Services” Report: Explores the importance of risk culture and the CRO’s role in driving a strong risk culture within organizations. Access Report

Professional Organizations and Associations:

  1. Global Association of Risk Professionals (GARP): Offers professional certifications, research, and networking opportunities for risk management professionals. Visit Website
  2. Risk and Insurance Management Society (RIMS): Provides resources, events, and educational programs for risk management professionals, including CROs. Visit Website

Note: Please ensure to verify the relevance and credibility of each resource before citing or relying on them for information.

26 Jan 2023

Enhancing Financial Integrity and Compliance: The Crucial Role of Internal Controls and the Sarbanes-Oxley Act

Categories Sarbanes–Oxley Act

Internal Controls: Ensuring Financial Integrity and Compliance

Internal controls are essential mechanisms, rules, and procedures implemented by companies to safeguard the integrity of financial and accounting information, promote accountability, prevent fraud, and ensure regulatory compliance. They play a critical role in corporate governance and have gained prominence since the accounting scandals of the early 2000s, which led to the enactment of the Sarbanes-Oxley Act of 2002.

Understanding Internal Controls

The Sarbanes-Oxley Act of 2002 was introduced as a response to corporate misconduct, aiming to protect investors and enhance the accuracy and reliability of corporate disclosures. This legislation made managers legally responsible for financial reporting and creating an audit trail. Failure to establish and manage internal controls properly can result in severe criminal penalties for managers.

To assess the effectiveness of internal controls, external auditors conduct audits of a company’s accounting processes and procedures. Their opinion accompanying financial statements is based on this evaluation. The auditor’s role is crucial in ensuring the accuracy and reliability of the procedures and records used for financial reporting.

Importance of Internal Controls

Internal audits are instrumental in evaluating a company’s internal controls, corporate governance, and accounting practices. They contribute to regulatory compliance and enable accurate and timely financial reporting and data collection. By identifying issues and rectifying deficiencies before external audits, internal controls help maintain operational efficiency.

Since the Sarbanes-Oxley Act of 2002 holds managers accountable for the accuracy of financial statements, internal audits have become even more critical in corporate operations. Managers must ensure the effectiveness of internal controls to meet their legal obligations.

Types of Internal Controls

While every company’s internal controls differ, certain core principles regarding financial integrity and accounting practices have become standard management practices. Examples of internal controls include:

  1. Segregation of duties: Assigning different employees to separate tasks to minimize the risk of fraud and error.
  2. Documentation and recordkeeping: Maintaining accurate and complete records of financial transactions and processes.
  3. Authorization and approval processes: Establishing clear guidelines and procedures for authorizing and approving financial transactions.
  4. Physical safeguards: Implementing measures to protect physical assets, such as restricted access to cash or inventory.
  5. IT controls: Safeguarding information systems, ensuring data integrity, and preventing unauthorized access or manipulation.
  6. Periodic reconciliations: Comparing financial records to external sources to identify discrepancies and errors.
  7. Training and education: Providing employees with the necessary knowledge and skills to understand and comply with internal controls.

Benefits of Properly Implemented Internal Controls

While implementing internal controls can be costly, the benefits outweigh the expenses. Properly designed and implemented internal controls can:

  • Streamline operations and improve operational efficiency.
  • Mitigate the risk of fraud, misappropriation of assets, and financial irregularities.
  • Ensure compliance with laws, regulations, and industry standards.
  • Enhance the accuracy and timeliness of financial reporting.
  • Provide assurance to stakeholders and investors regarding the integrity of financial information.

By adhering to internal controls, companies can foster a culture of accountability, transparency, and trust, thus bolstering their reputation and facilitating sustainable growth.

In conclusion, internal controls are integral to maintaining the integrity of financial information, preventing fraud, and ensuring regulatory compliance. The Sarbanes-Oxley Act of 2002 has made managers legally responsible for the accuracy of their companies’ financial statements, emphasizing the importance of internal controls. By implementing and continuously evaluating effective internal controls, companies can enhance operational efficiency, comply with laws and regulations, and safeguard their financial integrity.

Components of Internal Controls

Internal controls systems encompass various components that work together to ensure the integrity of financial information and promote accountability. These components include:

  1. Control environment: Establishes the importance of integrity and a commitment to identifying and addressing improprieties and fraud. The board of directors and management create this environment and set an example for employees.
  2. Risk assessment: Regularly evaluates and identifies potential risks or losses. Based on these assessments, additional controls may be implemented to mitigate risks or monitor related areas closely.
  3. Monitor: Continuously monitors the internal control system’s effectiveness. This involves updating systems, adding personnel, and providing necessary training to ensure ongoing functionality.
  4. Information/Communication: Ensures clarity of purpose and roles, facilitating employee understanding and commitment to internal controls. Clear communication channels enable employees to perform their jobs effectively.
  5. Control activities: Processes, policies, and actions that maintain the integrity of internal controls and ensure regulatory compliance. These activities include both preventative measures and detective measures.

Preventative vs. Detective Controls

Internal controls comprise control activities that can be classified into two main types:

  1. Preventative controls: Aim to deter errors and fraud by implementing measures that prevent these issues from occurring. Examples include:
    • Thorough documentation and authorization practices.
    • Separation of duties, ensuring no individual has complete control over a financial transaction and its resulting asset.
    • Limiting physical access to equipment, inventory, cash, and other assets.
  2. Detective controls: Backup procedures designed to identify issues that may have been missed by preventative controls. Examples include:
    • Reconciliation: Comparing data sets to identify discrepancies and taking corrective action.
    • Internal and external audits: Assessing the effectiveness of internal controls and identifying areas for improvement.

Limitations of Internal Controls

While internal controls are crucial, it is important to acknowledge their limitations:

  • Human judgment: The effectiveness of internal controls can be influenced by human judgment. High-level personnel may have the authority to override controls for operational efficiency, which introduces a potential risk.
  • Collusion: Employees can collude to bypass internal controls and conceal fraud or misconduct by working together secretly.
  • Reasonable assurance: Internal controls can only provide reasonable assurance, rather than absolute certainty, that financial information is accurate.

Importance of Internal Controls and Sarbanes-Oxley Act

Internal controls are essential for ensuring the integrity of financial and accounting information, promoting accountability, and preventing fraud. Key reasons for their importance include:

  • Compliance with laws and regulations.
  • Prevention of asset theft and fraudulent activities.
  • Improvement of operational efficiency and accuracy in financial reporting.

The Sarbanes-Oxley Act of 2002, enacted in response to accounting scandals, plays a significant role in emphasizing the importance of internal controls. The act aims to protect investors from fraudulent accounting activities and enhance the accuracy and reliability of corporate disclosures.

Conclusion

Internal controls are crucial for maintaining the integrity of companies’ operations and ensuring the reliability of their financial information. The Sarbanes-Oxley Act of 2002 has driven the adoption of robust internal control systems in response to corporate accounting scandals. While internal controls have limitations, such as human judgment and collusion risks, their implementation remains vital for safeguarding the trust of stakeholders and investors.

Comprehensive Resources for Further Reading

Websites and Online Resources:

  1. Securities and Exchange Commission (SEC) – Provides detailed information about the Sarbanes-Oxley Act, including regulations, compliance guidance, and updates. Visit the SEC website
  2. American Institute of Certified Public Accountants (AICPA) – Offers resources and guidance related to internal controls, auditing standards, and the implementation of Sarbanes-Oxley requirements. Explore the AICPA website

Books:

  1. “Internal Control Strategies: A Mid to Small Business Guide” by H. Lee Brumitt – Provides practical insights and strategies for implementing effective internal controls in mid to small-sized businesses. Amazon link
  2. “Sarbanes-Oxley Internal Controls: Effective Auditing with AS5, CobiT, and ITIL” by Robert R. Moeller – Offers a comprehensive guide to understanding and implementing internal controls in the context of Sarbanes-Oxley compliance. Amazon link

Academic Journals and Research Papers:

  1. “The Impact of the Sarbanes-Oxley Act on Internal Controls” by Anna Bergman-Blix – Explores the effects of the Sarbanes-Oxley Act on internal controls and the improvement of financial reporting quality. Read the paper
  2. “Internal Controls in the Wake of the Sarbanes-Oxley Act: A Review and Implications for Future Research” by Mark S. Beasley et al. – Examines the impact of the Sarbanes-Oxley Act on internal controls, identifies gaps, and suggests areas for future research. Access the paper

Reports and Studies:

  1. “Sarbanes-Oxley 404 Compliance Survey” by Protiviti – Presents findings and insights from a survey on Sarbanes-Oxley compliance, including internal controls and the challenges faced by organizations. Access the report
  2. “Internal Control over Financial Reporting: A Comprehensive Review” by The Committee of Sponsoring Organizations of the Treadway Commission (COSO) – Provides a comprehensive overview of internal control over financial reporting, including guidance on design and evaluation. Read the report

Professional Organizations and Associations:

  1. The Institute of Internal Auditors (IIA) – Offers resources, guidance, and professional development opportunities related to internal controls, risk management, and internal auditing. Visit the IIA website
  2. Association of Certified Fraud Examiners (ACFE) – Provides resources and information on fraud prevention, detection, and investigation, which are closely linked to internal controls. Explore the ACFE website
13 Jan 2021

What to Expect During a SOX Compliance Audit

Categories SoxLaw

In 2002, to reduce the number of corporate scandals that were prevalent during this time, the Sarbanes-Oxley Act was formed. These scams left large companies like Enron and WorldCom to be exposed, which resulted in their demise. Still, 20 years later, this act has kept businesses and CEOs personally accountable for any wrongdoing done by those they hire under them with regard to accounting audits. 

Now, these individuals are required by SOX rules to serve jail time if found guilty of criminal fraud against a company or its investors even after retiring from the position without knowledge of what went wrong on his watch. Since this law went into place, countless organizations believe that their compliance work has massively improved all internal controls. If you are someone who must undergo a SOX audit, here is what you can expect throughout this process. 

Does Your Company Need a SOX Audit? 

If you and your company are debating on whether or not a SOX audit is needed, here are some of the businesses that are required to complete one, according to the Sarbanes-Oxley act. 

  • All traded companies in the United States
  • All private companies that are beginning to prepare for their initial public offering, also known as an IPO
  • All publicly-traded companies that aren’t in the United States, but are still working with businesses in the United States
  •  All wholly-owned subsidiary companies 

A SOX compliance audit is most likely applicable for all companies, private and public, large and small. This type of audit is now required by federal law and will analyze and verify all areas of the business in question. 

Before a SOX Audit Begins

Before an audit such as this can be started, a company must take responsibility and hire an independent auditor. This means that the auditor must have no internal links to the company, and must be entirely separate. This must be done to ensure that there is no bias and that the audit about to take place will be impartial. Companies can do extensive research into finding the perfect firm to work with of course, but in the end, they must choose an unbiased candidate. 

What Does a SOX Audit Entail? 

After an organization or business has hired an unbiased and independent auditor, there will be a planned meeting. Business management and the auditing firm will get together and talk about the specifics of the audit when it will take place, what will be looked into and what results are expected to be found. An auditor may also go around and interview randomly selected staff to investigate if their daily duties match their job descriptions. 

An Audit for Internal Controls 

Section 404 of a SOX compliance audit is the largest and most important section that is always looked at. This section deals with the assessment of internal controls and covers four major categories that encompass all of a company’s IT assets. Listed below are the four major categories. 

  1. Access- This category focuses on the physical and electronic controls that can prevent employees and administration without the proper credentials to get denied access to high-quality information. Serves and data centers for a business are most likely kept in secure locations with strong passwords and lengthy log-in screens, keeping all those who don’t have access, away. 
  2. Security- In a company, security means that all computers, network hardware, and all other devices that financial data can go through, might be put in place to protect against a breach. If a breach does occur, these devices need to get to the start of the issues and find who was the one trying to access the information. 
  3. Change Management- This focuses on the process for new users and any type of company-wide software updates that are needed. When new software is added or database changes occur, they must be recorded. 
  4. Backup Procedure- All backup of sensitive data, even that from third parties and off-site data, must be properly secured and backed up in case of an emergency. 

 Sections That Should be Highlighted 

The Sarbanes-Oxley Act incorporates countless different portions, from business finances to corporate responsibility. In all, the SOX act is around 66 pages, but those who are scheduled to undergo this audit should look and familiarize themselves with these few important sections. 

Section 302

This section deals with the corporate responsibility for financial reports. Meaning, the CEO and CFO must be able to provide accurate documentation of a business’s financial reports. This section will look at the disclosure control and procedures needed for a CEO and CFO to certify that they are fully, and personally, responsible for establishing and maintaining disclosure controls within a company. 

Section 401

Section 401 is a two-part section that touches on the disclosures in public records and financial reports that need to be prepared in accordance with accounting standards. The next part of this section affirms that all companies are required to keep a report of any off-balance sheet disclosures. This is done to ensure that the business is meeting all the required accounting standards. 

Section 404

As the most costly section, 404 requires management, as well as the auditor, to report the accuracy and adequacy of the company in question’s internal controls on financial reporting. This section states that each company must have internal control reports as part of their exchange act report. 

Conclusion 

The many businesses that have undergone a SOX audit have said that it was worth it in the long run. Since 2002, this act has affected all companies, as well as accounting industries, and will continue to do so. For businesses that are heading towards their SOX audits, knowing what to expect and what to begin to prepare is very important. More information about the Sarbanes-Oxley Act, including the full act, can be found online.