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I f you have any familiarity at all with internal control concepts, you probably have an understanding of the traditional designations of preventive, detective, and corrective controls that relate to discouraging, finding, or correcting errors and irregularities. In the modern business world, I submit that this approach to internal control is simply not enough, and both the names for these groups of controls and the definitions of them must evolve.
Today, organizations are seeking Principled Performance—defined as reliably achieving objectives while addressing uncertainty and acting with integrity— and they want to address both downside threats and the upside offered by identifying and grasping opportunities. Nowhere is this clearer than in the context of the controls we establish for governance, risk management, and compliance (GRC) capabilities.
The OCEG GRC Capability Model notes:
“To achieve Principled Performance, the organization must proactively encourage conduct and events that support its objectives and prevent anything that threatens meeting those objectives. It also must be able to detect ongoing progress toward objectives and determine if undesirable conduct, conditions and events have occurred, or appear likely to occur. Finally, the organization must respond appropriately to desirable and undesirable conduct, conditions and events.”
With the growing availability of technologies that allow for fast and userfriendly analytics, the way we structure controls can offer so much more than detection of errors. We can use an integrated and layered system of various control types, including process, human capital, technology and physical controls, based on risk assessments and analyses to increase an organization’s confidence in its actions. In some frameworks and professions, the concept of control is narrow; in effect it is the “check” on actions management has put in place.
For example, someone with such a view of control would say that a company policy or training program is not a control, but the review of metrics that shows whether the policy or training has been distributed according to plan would be a control. In other frameworks and professions, the policy and training would also be considered controls, because they are designed to ensure the desired conduct. I don’t really care which view you take of the vocabulary, and to argue it is probably a waste of time. OCEG addresses this divide by referring to “management actions and controls” together. Whatever terminology you apply, the outcome needs to be the same. We need to classify management actions and controls under headings that reflect the ways they are used to help the organization achieve Principled Performance. I propose that the modern categories for controls are those set out in the OCEG GRC Capability Model – Proactive, Detective, and Responsive.
» Proactive management actions and controls include prevention but go beyond it. Proactive management actions and controls should be used to encourage desirable conditions and events and prevent those which are undesirable.
» Detective management actions and controls determine progress toward objectives and identify the actual or potential occurrence of desirable and undesirable conduct, conditions, and events.
» Responsive management actions and controls do more than correct errors. They help us to recover from undesirable conduct, events, and conditions; fix identified weaknesses; execute necessary discipline; recognize and reinforce desirable conduct and deter future undesired conduct or conditions. They support our ability to grasp opportunities.
What do we do differently if we think about management actions and controls in this way? First, we examine the objectives set by leadership, whether at the entity level or for a particular program or project, and establish actions and controls not only to address whatever might prevent achievement but also for what might enhance the likelihood of meeting those goals. Our entire control framework starts from that holistic perspective. Second, we build a control structure based on the understanding that each action or control can serve more than one purpose.
This leads us to establish a layered range of controls to avoid a single point of failure for high risk areas, while neither under-control nor over-control anything based on a risk assessment. Third, we recognize that we can, and must, be both proactive and responsive at the same time. Technology available to us today, and the resulting analytics and reports, allows us to be constantly reevaluating and rebalancing the full range of actions and controls. When we take such an integrated approach to the internal control environment, we are well positioned to achieve Principled Performance.
Switzer: In the PERFORM component of the OCEG GRC Capability Model, we’re looking at what types of actions and controls are essential in any organization to help it meet objectives, manage risk and ensure compliance. In general, when we talk about controls we refer to them as proactive, detective, or responsive in nature. What do we mean by proactive controls and what are some key examples?
Delmar: Organizations today are dealing with a great deal of change—the rise of the global, extended, digital enterprise, regulatory conflict at the global/local level, evolving workforces, emerging technologies and disruptive competitors. With this comes new risk to manage in the face of heightened standards and more demanding performance objectives. Successful organizations take a proactive stance in everything they do, while keeping a hand firmly on the operational rudder. Proactive controls actually exist at every level—strategic, tactical, and operational. An example of a proactive control for strategic business objectives is defining risk appetite and guardrails that can then be translated into what is acceptable and what is not in operations. An example of a tactical control is building a human capital plan to ensure we build an agile and resilient organization, where the right employees are attracted and retained. Examples of proactive operational controls include establishing operational limits, preapprovals, and access rights to prevent negative outcomes, and address issues in a highly responsive way, as they arise. It’s all about motivating and inspiring desired conduct. We are seeing more thoughtful consideration given to how to drive proactive controls into the day-to-day operating fabric of the organization —like driving a policy into specific procedures, which are then translated into performance driven authorities in actual job descriptions or SLAs with third parties—all designed to make the process highly responsive and agile.
Quinlan: Though they’re preventative in nature, it’d be a mistake to think that proactive controls are “set it and forget it” activities—though admittedly updating policies and refreshing course content can be some of the more arduous components of the compliance team’s function. It’s important to take input and key findings from monitoring processes and priorities set throughout your objectives, strategies, and operations and apply them to your controls. This continuous feedback loop also fosters continuous improvement of controls by better aligning them to ever-evolving requirements and expectations and ensures that you’re staying within your established risk capacity.
Switzer: When we look at detective controls, we’re talking about how you find out about conditions and behavior, both good and bad. How are forward thinking companies managing this process today, when there is so much information moving so fast in the organization?
Quinlan: We’ve entered an age where a compliance function that relies solely on a “push” strategy won’t cut it—it’s simply not enough. There’s a synergy that needs to be achieved in the push and pull of information between the compliance team and a company’s employees, and forward-thinking companies are being far more thoughtful and intentional about the channels they provide their employees. Beyond giving employees a choice of channels, companies increasingly focus on accessibility, ease of use and user experience in these channels. This is important: If your employees know how to get the information to you, and you make it easy for them to do so, in an environment that makes them feel comfortable and secure, it stands to reason that they’ll be more likely to give you more and better information to work with. Now you have the information in your hands, and you’ve got to do something with it. Your risk profile and appetite can help prioritize and route the information appropriately so that the issue at hand can be addressed by the right people in the appropriate timeframe. Once that’s done, look beyond the one-and-done triage. Use the data you’ve collected to create or fine tune controls that are targeted at the drivers of those incidents, conduct or threats— behavioral or environmental.
Delmar: Increasingly these channels are reaching beyond the traditional into social media and online communities where conversations are actually happening and behaviors may be crossing the line. We are seeing the emergence of technologies that support correlation and anomaly detection—actually ‘sensing’ when behaviors go outside the guiderails—and reign them in with blocking controls that respond in “machine-time” or automated escalation to the right people who can respond in “human-time.”
Switzer: Clearly, there is also the need for responsive controls, which may be in the nature of investigations and at other times automated responses are appropriate. From a process and technology perspective, how do you ensure the information developed from operation of proactive and detective controls is considered and responses take place?
Quinlan: The data from your controls has to be integrated. Bottom line. The manual aggregation of siloed data is a huge hindrance to the productivity, efficacy, and value of many compliance teams. It’s also a risk in and of itself because the more disconnected your controls and their data are, the more likely it is that something will be overlooked. If all of that valuable data is in one place, you’re not only less likely to miss the outliers that need to be addressed, but you’re more able to identify and address important trends within your organization and you’re able to filter, slice and prioritize it as needed; by your risk areas, for example. Taking a more federated approach to controls also allows the compliance team to ensure the occurrence and consistency of responses.
Delmar: What we are seeing now is attention paid to a kind of “right-sizing” of responsive controls across critical processes. What we know is that if controls are heavily layered in one part of the process, the ability to respond in an agile way downstream is often severely hampered. To get to the root cause it’s sometimes necessary to get up a few levels and get stakeholders looking at the entire end-to-end process—which could take you out of the boundaries of the organization, into third parties or technology service providers, into communities and social media. A hang-up or disconnect through the operational “weave” can cause real response problems for organizations, with real bottom-line impacts. This is particularly evident in supplier chain failures, business disruptions and cyber-breaches, for example. We live in an increasingly dynamic, automated, and complex world that is driving us continuously to seek greater flexibility and effectiveness in our control fabric.
Switzer: This leads us to talk about analytics—an essential element to consider and establish for all types of controls. What can be done today that couldn’t be done, or even dreamed about five years ago?
Delmar: The use of analytics in measuring performance has been around for centuries—it’s human nature to set goals and mark progress, whether it’s the yield on crops, conquering new lands, or exploring space. The gamechanger in the last five years has been greater ease of use of analytics that comes with automation—we can truly get a near-real time picture of outcomes against key performance, risk, and control indicators now by slicing and dicing big data—both structured and unstructured data. Remember—a metric is simply arithmetic—whereas an analytic is something that yields insight on which you can make decisions and act. Decision makers are no longer looking in the rear view window—but looking forward to where they want to drive performance to meet goals. So we are seeing more emphasis on questions like”What’s happening now? What could happen? What can we reasonably predict? What’s working or not working? What are our options? What’s our opportunity?” Today’s successful organizations are thinking very deeply about how to leverage an agile analytics framework to yield real-time indicators as they drive performance in their operations, and more importantly, out into their larger eco-systems of suppliers, third parties, customers, and employees on which their success depends.
Quinlan: When you look in the Csuite of a company, compliance is a relatively new function when you compare it to finance, HR, and the like, and I think the quality of performance metrics and expectations have been a reflection of that newness. Boards and executives haven’t quite been sure what to expect compliance reports to look like, so what they’ve gotten over the past decade or so have been very metric-based: number of calls to the hotline, training completion rates, etc. But those don’t give you insight into what’s really going on within your company, they don’t help you answer some of those important questions that Yo mentioned and they certainly aren’t on par with the performance analysis and insight the rest of the team is bringing to the table. The compliance executives that have been able to establish and advance a more productive conversation around compliance within their organizations are the ones that have focused on establishing and producing detailed analyses across their controls.