Page 45 - COSO Guidance Book

Enterprise Risk Management | Compliance Risk Management: Applying the COSO ERM Framework | 5

ERM is different than, but related to, internal controls. ERM There is not a universally accepted definition for the
incorporates some of the concepts of internal control. In scope of an organization’s C&E program. It can vary from
fact, implementation of internal controls is the most common one organization to another. As a result, compliance with
approach to reducing risk. But ERM also includes certain some laws and regulations may be primarily subject to the
concepts that are not considered within internal control. For oversight of others, although the compliance function should
example, concepts of risk appetite, tolerance, strategy, and always be prepared to serve an overarching role or to step
business objectives are set within ERM, but are viewed as in to assist or address issues if the others are unable or
preconditions of internal control. ERM is more closely aligned unwilling to properly manage the risk.
with strategy than internal control.
Another difference among organizations may involve where
An important aspect of ERM is its focus on creating, the compliance function “sits” within the organization.
preserving, and realizing value. The C&E program supports Although a C&E program is organization-wide, involving
each of these three goals. An effective C&E program employees and managers from all functional areas, the
allows an organization to more confidently pursue new compliance function, consisting of a dedicated team of
value creation opportunities. Further, value that has been compliance and ethics professionals, may be positioned in
created by an organization can quickly become impaired a variety of locations within an organization chart. In most
when accompanied by violations of laws or regulations. An organizations, it is an independent function, and this is
effective C&E program can preserve this value and enable an considered the best practice. In others, it may be a part of, or
organization to fully realize it. report to, legal, internal audit, risk management, or another
function. Regardless of where the compliance function is
Accordingly, the management of compliance risk is an positioned on an organization chart, communication and
important element of both the internal control and the collaboration with each of the preceding functions are
broader ERM functions and processes of an organization. essential to the success of a C&E program.

The scope and positioning of the compliance Likewise, ethics may be considered a function apart from
function in an organization compliance. In many organizations, however, compliance
As noted earlier, compliance risk generally involves the risk and ethics fall under a compliance and ethics officer.
of violations of laws and regulations, but it may also address
contract provisions, professional standards, organizational It is important to understand that although virtually every
policy, and ethics matters. The laws and regulations that employee plays a role in managing risk, the management/
fall within the scope of a compliance program, however, mitigation of compliance risk is primarily the responsibility of
can vary by industry and from organization to organization. all management at all levels. The compliance function leads
For example, risk of violating the Foreign Corrupt Practices the development of the C&E program, but it is ultimately
Act may fall clearly within the scope of a company’s C&E management’s job to execute the program and for the board
program. But compliance with accounting standards to provide oversight. The role of the compliance and ethics
required in filings with the U.S. Securities and Exchange officer is to help management understand the risks; lead the
Commission may be addressed within the accounting and development of the program to mitigate and manage those
finance functions and may be considered outside the scope risks; evaluate how well the program is being executed;
of the C&E program. Human resources and employment law and report to leadership on gaps in coverage, execution,
risks may be managed entirely within the human resources or material instances of noncompliance, including those by
function, or the compliance function may also participate in senior leaders.
managing these risks.
In summary, management of compliance risk can be
performed effectively under a variety of structural models.
This publication provides guidance on the design and
operation of an effective C&E program regardless of the
organizational structure or how responsibilities are allocated.

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