Title: New York State Internal Control Association
1- New York State Internal Control Association
Control Environment - Tone at the Top
February 28, 2002
Soft Controls Committee
Paul Casey Kelly Chrzanowski
Carole Clements Niels Hansen
Donna Lorenson Steve Suriano
2Control Environment
Objectives
- What are the components?
- What does a good control environment look like?
- How do you evaluate your organization?
3Control Environment
COSO Pyramid
4Control Environment
Key Components
- Ethical Values and Integrity
- Managements Operating Style and Philosophy
- Competence
- Morale
- Supportive Attitude
- Mission
- Structure
5Definition of Internal Control
- Internal control or an internal control system
is the integration of the activities, plans,
attitudes, policies, and efforts of the people of
an organization working together to provide
reasonable assurance that the organization will
achieve its objectives and mission.
6Control Environment
- Mission
- Statement of organizational purpose
- Provides direction
- Motivates staff
- Increases organizational focus
7Mission and Strategic Planning
Strategic Planning
- Disciplined effort to produce fundamental
- decisions and actions that shape and guide
- what an organization is, what it does, and why
- it does it, with a focus on the future.
8Mission and Strategic Planning
- Developing a Strategic Plan
- Objectives
- Performance Measures
- Reporting
- Evaluation/Change
- Training
- Examples of Strategic Plans
- State Education Department
- Dormitory Authority Balanced Scorecard
9Integrity and Ethical Values
- The effectiveness of internal controls depends on
the integrity and ethical values of the people
who create, administer, and monitor them - Integrity and ethical values are essential
elements of the control environment affecting
the design, administration and monitoring of
other internal control components
10Integrity and Ethical Values
Include the following
- Tone at the Top
- Corporate Culture
- Code of Conduct
- Removing temptation for unethical behavior
- Dealing with people outside the organization
11Integrity and Ethical Values
Tone at the Top
- Ethical tone is established at the top and
communicated throughout the agency - Management encourages integrity and ethical
values - Action is taken on potential problems
- Management is aware of ethical issues inherent in
the operation of its action plans
12Integrity and Ethical Values
Tone at the Top continued.
- Adherence to laws and policies is encouraged by
management - Management shows a commitment to excellence
- Respect is shown for employee rights
- Management encourages adherence to professional
standards
13Integrity and Ethical Values
Corporate Culture
- Includes ethical and behavioral standards, how
theyre communicated and how theyre reinforced
in practice - Top management plays a key role
- Official policies specify what management wants
to happen but corporate culture determines what
actually happens - Employees indicate that peer pressure exists for
appropriate moral and ethical behavior
14Integrity and Ethical Values
Code of Conduct
- Agency has established and uses a Code of Conduct
- Possible types of disciplinary actions are
communicated throughout the agency - Disciplinary action is taken in response to
departures from approved policies and procedures
or violations of the Code of Conduct
15Integrity and Ethical Values
Removing Temptation for Unethical Behavior
- Management sets realistic goals
- Management encourages a sense of shared
accountability among employees - Processes and control systems promote compliance
with regulations - Management provides incentives for adherence to
ethical values - Compensation and promotion are based on
performance
16Integrity and Ethical Values
Dealing with Outside Organizations
- Dealings conducted on a high ethical plane
- Accurate reporting
- Management cooperation with auditors
- Under billings by suppliers or overpayments by
customers are quickly corrected
17Commitment to Competence
- HR Policies Procedures
- Common understanding
- Consistency
- Compliance
- Accessible to everyone
- Skill Knowledge level for every position
- Job descriptions periodic review
- Qualifications education, experience
- Resources to do the job
- Equipment, software good work environment
- Policy and procedure manuals
18Commitment to Competence contd..
- Recruiting Hiring
- Employment application
- Canvassing process (Civil Service)
- HR screening
- Interview process
- Background check credit, criminal, reference,
education - Employee Orientation
- First day
- Probation
19Commitment to Competence contd..
- Training
- Commitment
- Ethics/Internal Controls
- Skills
- Cross-Training
- General Development Training
20Commitment to Competence contd..
- Performance Evaluations
- Routine communication
- Training
- Structured/Consistent
- Interview staff feedback
- Future developments training
- Non-compliance Inappropriate Behavior
- Disciplinary action
- Reward Recognition
- Employee Development Program
21Supportive Attitude
- Managements support for internal controls sets
the tone for the entire organization.
22Supportive Attitude
Showing Support for Internal Controls
- Encourages and allocates resources to Internal
Control training - Meets with Internal Control personnel
23Supportive Attitude
Showing Support for Internal Controls contd..
- Discourages circumventing internal controls and
policies control overrides are limited and
fully documented - Supports the Internal Audit function
24Supportive Attitude
Showing Support for Internal Controls contd..
- Acts on recommendations from internal/external
audits and internal control reviews - Staffs the internal control and internal audit
functions with competent personnel-appropriate
experience, skills, and abilities
25Control Environment
Key Components
- Mission
- Ethical Values and Integrity
- Competence
- Supportive Attitude
26Evaluating the Control Environment
External Perspective
- Characteristics of an effective board or audit
committee - Independence from management
- Experience and stature of the members
- Extent of involvement and scrutiny of activities
- Interaction with internal and external auditors
27Evaluating the Control Environment
External Perspective
- Oversight Groups
- Internal Audit
- Reporting relationship
- Assessing competence and objectivity
- Regulatory oversight
- Frequency and extent of review procedures
- Results
- Corrective action plans and follow-up
28Evaluating the Control Environment
External Perspective
- Management characteristics
- Structure
- Integrity and ethical values
- Aggressive vs. conservative policies and
practices - Compensation and incentives
29Evaluating the Control Environment
External Perspective
- Human Resources
- Organizational structure
- Assignment of authority and responsibility
- Policies and procedures
- Staff Turnover
- Training
30Evaluating the Control Environment
External Perspective
- Techniques for Assessing Effectiveness
- Interviews
- Questionnaires
- Observation
- Evidential matter
- Prior experience
31Evaluating the Control Environment
External Perspective
32Evaluating the Control Environment
Internal Measures
- Mission Statement
- Strategic Plan
- Performance Measurement
- Ethics
- Competence
- Supportive Attitude
33Conclusion
- A control environment consists of the
elements of an organization that all its
employees experience, including the leadership.
These are the philosophical, sociological and
psychological aspects of human work interactions
that impact individual behaviors, attitudes and
effectiveness. Ethics is at the core of the
control environment. Leadership sets the ethical
tone. Ethical leaders seek to correct what does
not work and endeavor to find and maintain
competent staff. Morale tends to flourish with
such leaders.
34Questions and Discussion