Consider Outcomes before Benchmarking Internal Controls

When it comes to financial controls, it’s not about ROI. Effective benchmarking depends on clear outcome expectations.

Following my recent presentation at a conference of financial executives, a member of the audience asked “What is the typical cost of a program for internal control over financial reporting processes?” He continued, “Is there a way to benchmark these costs?”

Good question, and one that certainly can and should be asked about the full range of compliance and internal control processes across the enterprise.

We have a great guide on our site called the OCEG Metrics and Measurement Guide (MMG) which provides a ton of good information on how to measure an internal control and/or compliance program of any type. That said, there are some important things to remember.

Benchmarking. An often-uttered word. One that indicates we are serious executives. That we are doing what it takes to optimize our programs. But how does it really work and what does it really do for us?

The concept of benchmarking is great, but before we can benchmark we need to define the outcomes that we hope to deliver. By way of example, when evaluating call center metrics, the starting point is understanding customer satisfaction (or some similar indicator). Without this top-level indicator of the outcome we hope to generate, it is impossible to evaluate other indicators such as cost. In a vacuum, spending $100 to resolve a customer problem is superior to spending $200 to resolve the same customer problem. However, the “vacuum” does not exist. If the $200 resolution delivers 95% satisfaction and the $100 resolution delivers 50% satisfaction, most executives would choose the former.

So what does that mean for us? As financial professionals, we must define the outcomes that we hope to achieve through our internal control programs, as well as indicators of success. Only then can we even begin to benchmark our costs, cycle times and other program attributes in a meaningful way. To engage in a benchmarking effort without taking the time to first establish clear outcome expectations is putting the cart before the horse – the time and resources spent will be wasted.

While every organization is unique and therefore pursues unique objectives, most organizations strive to achieve growth, profitability, total shareholder return, and key value drivers such as workforce productivity, quality, customer loyalty, and innovation. In the same way, each of our programs for internal financial control will be unique and should strive to achieve unique objectives, but every program should deliver on these universal objectives:

• Promote business conduct in-line with business objectives
• Prevent noncompliance and weaknesses
• Prepare the organization to deal with noncompliance and weaknesses when (not if) they occur
• Protect the organization from negative consequences
• Detect noncompliance and weaknesses earlier rather than later
• Respond to noncompliance and weaknesses more quickly rather than slowly
• Improve the program so that similar noncompliance and weaknesses are not repeatedly encountered
• Reduce losses due to noncompliance including fines, penalties and investigation costs
• Enhance the culture so that, even in the absence of controls, the workforce is inclined to do business within defined boundaries of conduct

Now, undoubtedly, I will get a few emails (mostly from consultants) noting that the benefits of implementing a strong program of internal controls go beyond the outcomes listed above. Fine. Shareholders will be thrilled if our programs deliver more. But at the end of the day, if we cannot demonstrate that our programs deliver on the universal outcomes above, we need to get new day jobs.

Once we have a firm understanding of whether, and the degree to which, our programs are achieving top-level outcomes, we can discuss whether we have optimized the outlay of financial and human capital. In addition, we can thoughtfully analyze whether process improvement (e.g., reducing the cycle time to discover noncompliance of a particular type) is worth the investment.

Antitrust Compliance

On a recent webcast, I spoke with Michael Horowitz, a commissioner with the United States Sentencing Commission (USSC) and Eric Morehead, the assistant general counsel at the USSC. The topic of discussion was antitrust.

The entire webcast can be found at OCEG.

As always, it was an interesting session where Mr. Horowitz outlined the key dimensions of criminal antitrust (essentially price fixing) and contrasted these issues with civil antitrust issues (such as monopolistic behavior).

A real gem came at the end of the session during the audience Q&A. One participant asked how organizations should structure their compliance training to address antitrust issues. Specifically, they wanted to know where to "draw the line" when it comes to who should be trained.

Mr. Horowitz provided some very insightful advice. While it would be unusual for, say, an executive assistant to engage in product pricing or negotiating activities they should still be trained. The reason being that these are the individuals who book travel and arrange meetings for people who DO engage in pricing and negotiating activities. In fact, often, executive assistants are called as witnesses in antitrust cases.

Mr. Morehead provided some excellent details about how antitrust is addressed in the U.S. Federal Sentencing Guidelines and some statistics about prosecution. A summary follows:

• Base Offense Level is 12
• Non-Competitive bidding increases the offense level
• The “Volume of Commerce” also can adjust the Offense Level upward from 2 to 16 levels
• Special instructions for fines – individuals to pay a fine equal to one to five percent of the “volume of commerce”, but never less than $20,000.
• Special instructions for sentencing organizations

Volume of Commerce

• The “volume of commerce done by” the defendant in “good or services that were affected by the violation”
• Cumulative amount that can cover multiple counts or conspiracies
• Amount is the commerce affected by the conspiracy

2005 Amendments

• Base Offense Level was increased from 10 to 12.
  
• Volume of Commerce Table was enhanced – range went
  from $ 400,000 - $ 100,000,000
  to $1,000,000 - $1,500,000,000
  
• The adjustments for volume of commerce also increased from a prior maximum of 7 levels to a new maximum of 16 levels, reflecting a new maximum enhancement of for volume of commerce.
• These changes reflected the Antitrust Division’s experience of uncovering larger dollar conspiracies and also fostered greater proportionality between antitrust sentencing guidelines and fraud offense guidelines.

Individual Sentences
In FY 2003 In FY 2006
Mean 7.2 Months 8.2 Months
Median 4 Months 9 Months
Number 12 Cases 12 Cases

Organizational Sentences
In FY 2003 In FY 2006
Mean $6.2 MM $46.5 MM
Median $2.7 MM $1.1 MM
Number 10 Cases 15 Cases

Source: 2003 Sourcebook of Federal Sentencing Statistics, U.S. Sentencing Commission; 2006 Sourcebook of Federal Sentencing Statistics, U.S. Sentencing Commission

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