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FROM: MAR-APR 2008 ISSUE
In August 2007, the International Federation of Accountants (IFACs) Professional Accountants in Business (PAIB) Committee published interviews with 10 leading PAIBs on their experiences and views on internal control in a paper entitled Internal Control from a Risk-Based Perspective. Although the interviewees were from different organizations around the world, they all struggled with similar issues and their solutions point in the same direction. The experiences of these fellow PAIBs illustrate that internal control can drive performance and create value for your organization. Here is a brief summary.
Internal Controls Are Key
Every organization is different. However, it becomes clear that some essentials transcend the differences in types and style of businesses. In essence, a strong risk management and internal control system is a key and integral part of running and managing a disciplined and controlled business. Enterprise risk forces the management team to clearly articulate their objectives, enables them to make informed decisions about the challenges and risks, and helps them to target resources to achieve the best possible results.
Facing Up To the Issues
A significant issue in enterprise risk management and internal control is retaining the efficiency of the process while maintaining effectiveness. Another challenge is trying to get people to appreciate the internal control system for its own sake. Employees have to see it as useful in its own context.
Identifying the Successes
A change in culture is one of the successes of implementing risk management and internal control. Specifically, employees throughout the organization begin to expect “continuous improvement” as part of the culture. Interviewees said risk management and internal control were enabling concepts, not restrictive ones, and gave them the confidence to make the most of every opportunity.
Learning From the Failures
Weaknesses occur when people take their eyes off the ball. Interviewees said they needed to see the warning signs in their organizations early and not allow problems to drift. It is the human touch that ultimately determines the success of the control environment. Recruiting the right people reduces the cost of control systems dramatically.
Lessons Learned
Each interviewee learned a valuable lesson in applying internal controls, including:
- An enterprise cannot survive and flourish if it’s not built with a design in mind and the discipline of controls is intended to assure success;
- Well-designed controls should create a positive work environment and contribute to the bottom line;
- Internal staffers must be onboard with the changes and management should talk to them constantly in an open and honest way;
- Management must communicate to employees that risk management and internal control is one of the organization’s key values;
- Commercial imperatives should never be forgotten. It is no good having a director who creates opportunities but who doesn’t properly control his business;
- It is better to enhance internal controls slowly and well than rather than too quickly, which may cause mistakes and require management to start the process over.
This interview paper is part of a larger PAIB Committee project on internal control. In 2006, the committee published an overview paper, Internal Controls – A Review of Current Developments, which reviewed current developments and some of the latest thinking in the area of internal control. These two publications form the groundwork for the development of principles-based good practice guidance on internal control, which the PAIB Committee plans to issue in 2008.
For the full paper, visit the PAIB section of the bookstore, www.ifac.org
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