Control Conscious Environment
The control environment is the control consciousness of an organization; it is the atmosphere in which people conduct their activities and carry out their control responsibilities. An effective control environment is an environment where competent people understand their responsibilities, the limits to their authority, and are knowledgeable, mindful, and committed to doing what is right and doing it the right way. They are committed to following an organization's policies and procedures and its ethical and behavioral standards. The control environment encompasses technical competence and ethical commitment; it is an intangible factor that is essential to effective internal control.
Corporation members and management enhance an organization's control environment when they establish and effectively communicate written policies and procedures, a code of ethics, and standards of conduct. Moreover, corporation members and management enhance the control environment when they behave in an ethical manner - creating a positive "tone at the top" - and when they require that same standard of conduct from everyone in the organization.
Effective human resource policies and procedures enhance an organization's control environment. These policies and procedures should address hiring, orientation, training, evaluations, counseling, promotions, compensation, and disciplinary actions. In the event that an employee does not comply with an organization'' policies and procedures or behavioral standards, an organization must take appropriate disciplinary action to maintain an effective control environment. The control environment is greatly influenced by the extent to which individuals recognize that they will be held accountable.
Management is responsible for "setting the tone" for their organization. Management should foster a control environment which encourages:
- The highest levels of integrity and personal and professional leadership
- A leadership philosophy and operating style which promote internal control throughout the organization;
- An assignment of authority and responsibility which ensures the highest possible level of accountability.
The following action steps will help to encourage ethical behavior:
- Communicate to employees that fraud (embezzlements, stealing, etc.) and conflicts of interest will not be tolerated.
- Communicate that University policies and procedures are important and will be followed.
- Make employees fully aware of their responsibilities (including internal controls).
- Document key department/college/school policies and procedures.
- Send employees to ethics and internal control training.
- Evaluate personnel based on performance related to internal controls.
- Take disciplinary or other actions for non-performance.
- Monitor the internal control system on an on-going basis.
Case Study
Laura is a new employee in XYZ Department at Wahoo University. It is her first day on the job and her Supervisor offers to introduce Laura to people in the department.
First, Laura meets the office secretary who informs Laura that after she meets everyone in the department, she needs to go down to Human Resources and fill out a bunch of forms. The secretary says to Laura, "Don't worry about reading any of it, just tell them you want automatic everything and you can be back in time for us to take you to lunch."
While walking down the hall to meet the next person, Laura asks her supervisor about department policies and procedures, especially those that pertain to her job. The supervisor informs her that there are not any department policies and procedures and that she should just look around her office and figure out the way the previous guy did her job. The supervisor says to Laura, "I think we have something called Regents' Rules and Regulations and BPMs, but I've never seen them. If you have a question, ask me and I'll call Frank. He's been with this place for years and he knows all the ways to get around the bureaucracy around here."
Next, Laura meets the office accountant. As she walks into the accountant's office, she notices that he is playing a golf game on his computer. Obviously embarrassed, he explains that he just got the game from a guy in Information Resources. As he exits the program, she notices that a Federal income tax return pops up on the screen. He explains that he does a few personal income tax returns on the side to make a few extra bucks. "After all," he explains, "they don't pay a person what he's really worth around here."
Next, Laura meets the Assistant Director. He requests a private meeting with Laura to introduce himself to her. While in his office, he asks, "Well Laura, I noticed that you aren't wearing a wedding ring. Are you seeing anyone right now?" Surprised by his question, she doesn't say anything. He says, 'You are a very attractive woman and I like to encourage all our people to get to know each other inside and outside the office. I look forward to our working together and if you ever need anything, just come by and see me."
After meeting several other people in the office, she meets the Director of the department. He seems very nice and apologizes for not being able to go to lunch with her and everyone else. He explains that he has made lunch plans to meet an old buddy who is bidding on one of the department's requests for proposal (RFPs).
After filling out the forms in Human Resources, Laura returns to the office and finds that everyone is waiting for her to go to lunch. Laura explains that she brought her lunch and that she needs to cash a check to go out for lunch. The office secretary says, "Don't worry, Laura, just get $20 out of the petty cash fund for your lunch. It's an unofficial benefit for first day employees. I'll write it up as a "miscellaneous expense." Laura is stunned; she does not know what to do.
Required:
- Underline everything in the case study that contributes negatively to the Department's control environment.
- What does this Department's control environment communicate to Laura?
Last Updated: November 17, 2008 (vm).
