Internal Controls Joy Becket is the director of Eyeglasses for the Poor (EP). EP

Question

Internal Controls

  
Joy Becket is the director of Eyeglasses for the Poor (EP). EP receives donations of eyeglasses and recycles them for use by the nearsighted needy around the world. Sometimes the eyeglass frames are expensive designer frames that can be sold to raise operating funds for the organization. Joy is concerned that EP’s resources are not adequately safeguarded. This problem is compounded by the fact that there are relatively few employees so separation of duties is difficult. She does know that if anything goes wrong (i.e. waste of resources, embezzlement), she will be held responsible. Therefore, she has called you in as an expert consultant in the area of accountability and control. She has asked you to recommend specific procedures and policies for enhancing the internal controls for the organization. Write a one-page memo identifying policies and procedures she should consider adopting.

Internal Controls

Explanation / Answer

Solution:

There are many definitions of internal control, as it affects the various constituencies (stakeholders) of an organization in various ways and at different levels of aggregation.

Under the Internal Control-Integrated Framework, a widely used framework in not only the United States but around the world, internal control is broadly defined as a process, effected by an entity's board of directors, management, and other personnel, designed to provide reasonable assurance regarding the achievement of objectives relating to operations, reporting, and compliance.

Roles and responsibilities in internal control

According to the Eyeglasses for the Poor Framework, everyone in an organization has responsibility for internal control to some extent. Virtually all employees produce information used in the internal control system or take other actions needed to affect control. Also, all personnel should be responsible for communicating upward problems in operations, noncompliance with the code of conduct, or other policy violations or illegal actions. Each major entity in corporate governance has a particular role to play:

Management

The Chief Executive Officer (the top manager) of the organization has overall responsibility for designing and implementing effective internal control. More than any other individual, the chief executive sets the "tone at the top that affects integrity and ethics and other factors of a positive control environment. In a large company, the chief executive fulfills this duty by providing leadership and direction to senior managers and reviewing the way they're controlling the business. Senior managers, in turn, assign responsibility for establishment of more specific internal control policies and procedures to personnel responsible for the unit's functions. In a smaller entity, the influence of the chief executive, often an owner-manager, is usually more direct. In any event, in a cascading responsibility, a manager is effectively a chief executive of his or her sphere of responsibility. Of particular significance are financial officers and their staffs, whose control activities cut across, as well as up and down, the operating and other units of an enterprise.

Operating Staff:

All staff members should be responsible for reporting problems of operations, monitoring and improving their performance, and monitoring non-compliance with the corporate policies and various professional codes, or violations of policies, standards, practices and procedures. Their particular responsibilities should be documented in their individual personnel files. In performance management activities they take part in all compliance and performance data collection and processing activities as they are part of various organizational units and may also be responsible for various compliance and operational-related activities of the organization.

Staff and junior managers may be involved in evaluating the controls within their own organizational unit using a control self-assessment.

Internal controls and process improvement:

Controls can be evaluated and improved to make a business operation run more effectively and efficiently. For example, automating controls that are manual in nature can save costs and improve transaction processing. If the internal control system is thought of by executives as only a means of preventing fraud and complying with laws and regulations, an important opportunity may be missed. Internal controls can also be used to systematically improve businesses, particularly in regard to effectiveness and efficiency.

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