Question 3. Describe the major elements in the control environment of a business organization. 1.

Integrity and Ethical Values An institutions objectives and how they are achieved are based on preferences, value judgments and management styles. Those preferences and value judgments, which are translated into standards of behavior, reflect leaders integrity and their commitment to ethical values. Organizational values cannot rise above the integrity and ethics of the people who create, administer and monitor them. Certain organizational factors can influence the likelihood for fraudulent acts or questionable financial reporting practices. Individuals may engage in dishonest, illegal or unethical acts simply because their institutions create strong incentives or temptations to do so. Ethical values need to be clearly communicated. The most effective way of transmitting a message of ethical behavior is by example. People imitate their leadership. However, setting a good example is not enough. Codes of conduct need to be clearly defined in written policy and should include issues such as conflicts of interest, and illegal or otherwise improper activities. Managements real concern can often be evaluated in terms of how violators are dealt with. Messages sent by a leaders actions in these situations quickly become embodied in the organizations culture. 2. Commitment to Competence Hiring competent people and a commitment to maintain competency are essential elements in a control environment. Administrators need to specify the competence levels for particular jobs and translate those levels into requisite knowledge and skills. 3. Philosophy and Operating Style Leaderships philosophy and operating style affect the way the organization is managed. This includes factors such as risk taking, attitudes toward financial reporting, reliance on policies and procedures, and delegation of authority. Assignment of authority and responsibility involves the degree to which individuals and departments are encouraged to use initiative in addressing issues and solving problems, as well as the limits of their authority. Delegation of authority, or empowerment means placing control for certain decisions at lower echelons; to the individuals who are closest to everyday activity. The control environment is greatly influenced by the degree to which individuals recognize that they will be held accountable. A critical challenge is to delegate to the extent required to achieve objectives. 4. Organizational Structure An organizations structure provides the framework within which its activities for achieving entity-wide objectives are planned, executed, controlled and monitored. Organizational structure is often a result of administrative philosophy and may be centralized or decentralized or may be structured on a functional basis. The appropriateness of an organizations structure depends, in part, on its size and the nature of its activities. 5. Human Resource Practices and Policies. Human resource practices and policies send messages to employees regarding expected levels of integrity, ethical behaviour and competence. Such practices relate to hiring, orientation, training, evaluation, counseling, promoting activities as well as compensating and remedial actions. Make sure that your employees understand their job responsibilities, the limits to their authority, expected performance standards, and reporting relationships. 6. Board of Directors or Audit Committee. The Board of Directors or Audit Committee should be independent from management, such that necessary, even if difficult and probing, questions are raised. The frequency and timeliness with which meetings are held with chief financial and/or accounting officers, internal auditors and external auditors is also a consideration for control. Sufficiency and timeliness with which information is provided to Page | 1

board or committee members, to allow monitoring of managements objectives and strategies, the entitys financial position and operating results, and terms of significant agreements. 7. Segregation of Duties. Segregation of duties is a preventive control that aids in the timely detection of errors and irregularities in the normal course of business. Functions are divided so that no one person has control over all parts of a transaction. The Two key questions are: Does one person perform all parts of the transaction from initiating to reconciling the account? Does someone have access to information systems that create a separation of duties problem? 8. Authorization. Authorization means that the transactions are executed and access to assets is permitted only in accordance with managements directives. Approval of a transaction means that the approver has reviewed the supporting documentation and is satisfied that the transaction is appropriate, accurate and complies with applicable laws, regulations, policies, and procedures. This is a preventive control. 9. Control over assets. Control over assets and records to ensure they dont disappear includes both preventive and detective controls. Establishing control procedures to prevent loss of physical and intellectual assets/records and assuring that assets/records are physically secured are preventive controls. Taking a physical inventory, on the other hand, is a detective control.

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REFERENCES. Cale, Edward G., Jr (January 01, 1994), Journal of Systems Management. DLM Notes Materials. James A. OBrien (2002), Introduction to Information Systems 11th Edition, McGraw-Hill Corporation Laudon, Kenneth C., and Jane Price Laudon (1991), Management Information Systems: A Contemporary Perspective 2nd Edition, Macmillan, New York. Romney B. Marshall, Steinbart P. John (2003), Accounting Information Systems 9th Edition, PrenticeHall, USA. Anthony, Robert N., and Leslie K. Pearlman (1999) Essentials of Accounting, Prentice Hall, USA.

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