Transcript Controls as a Motivator - aga

Controls as a Motivator
AGA Audio Session November, 2008
Professional Development Associates
Developed and Presented by:
Michael L. Piazza
Michael L. Piazza
Principal Associate
Professional Development Associates
[email protected]
601.209.9607
Controls as a Motivator
Session Outline and Topics
• Review of Maslow’s Hierarchy of Needs Motivation
Concepts
• Summary of COSO Concepts
• COSO to Maslow
• Question and Answer Session
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Food, clothing, shelter
Basic Needs
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Health and well being
Safety against adverse events
Less fear of the future
Security Needs
Safety and Security Needs
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Need for love
Desire for friendship
A need for comradeship
Group Needs
Belongingness Needs
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Ego/Achievement
Desire for self respect
A feeling of personal worth
Need for autonomy
Self Needs
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Self Actualization
The need to create
Self in the now
No worry of tomorrow, no regret of the past
Highest Potential Needs
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COSO Definition of Internal Control
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 in the following
categories:
•Effectiveness and efficiency of operations
•Reliability of financial reporting
•Compliance with applicable laws and regulations
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Key Concepts
•A process -A means to an end, not an end in itself.
Internal control is there for a purpose and the purpose
should be the focus of the internal control not the control
itself.
•Effected by people - not merely policy manuals and forms
but people at every level of an organization. How people
interpret the control is essential. The way people have been
brought up or the beliefs of the individuals have an effect on
how they will react in a given situation.
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Key Concepts
Expected to provide reasonable assurance - Not
absolute assurance to an entity's management and board.
No system can provide absolute assurance and to think that
any system of internal control can is foolish. The cost to
develop a system of internal control to ensure compliance
will be cost prohibitive so management must settle for a
reasonable assurance.
Geared to the achievement of objectives - In one or
more separate but overlapping categories. The system of
internal control is enacted to provide the organization a
better chance of achieving its stated objectives and goals.
Controls should signal when the process is starting to go
astray and the achievement of objectives or goals is being
jeopardized.
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Components of Internal Control
Control Environment
Risk Assessment
Control Activities
Information and Communication
Monitoring
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COSO Internal Control
Components
Control Environment - The control environment sets the tone of an
organization, influencing the control consciousness of its people. It is the
foundation for all other components of internal control, providing discipline and
structure.
The core of any business is its people - their individual attributes, including
integrity, ethical value and competence - and the environment in which they
operate. They are the engine that drives the entity and the foundation on which
everything rests.
Integrity and Ethical Values
Commitment to Competence
Board of Directors or Audit Committee
Management's Philosophy and Operating Style
Organizational Structure
Assignment of Authority and Responsibility
Human Resource Policies and Procedures
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Integrity and Ethical Values
Integrity and Ethical Values - An entity's objectives and the way 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 management's
integrity and its commitment to ethical values.
An entity's objectives and the way 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 management's integrity and its commitment to
ethical values.
Because an entity's good reputation is so valuable, the standard of
behavior must go beyond mere compliance with law. In awarding
reputation to the best companies, society expects more than that.
The effectiveness of internal controls cannot rise above 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.
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Ego/Achievement
Self Actualization
Integrity is a prerequisite for ethical behavior in all aspects of an enterprise’s
activities. Establishing ethical values often is difficult because of the need to
consider the concerns of several parties. Top management’s values must
balance the concerns of the enterprise, its employees, suppliers, customers,
competitors and the public. Balancing these concerns can be a complex and
frustrating effort because interests are often at odds. For example, providing and
an essential product (petroleum, lumber, food) may cause some environmental
concerns.
Focusing solely on short-term results can hurt even in the short term.
Concentration on the bottom line – sales or profit at any cost – often evokes
unsought actions and reactions. High pressure sales tactics, ruthlessness in
negotiations or implicit offers or kickbacks, for instance, may evoke reactions that
can have immediate (as well as lasting) effects.
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Belongingness Needs
Ego/Achievement
Ethical behavior and management integrity are a product of the “corporate
culture.” Corporate culture includes ethical and behavioral standards, how they
are communicated and how they are reinforced in practice. Official policies
specify what management wants to happen. Corporate culture determines what
actually happens, and which rules are obeyed, bent or ignored. Top
management – starting with the CEO – plays a key role in determining the
corporate culture. The CEO usually is the dominant personality in an
organization, and individually sets its ethical tone.
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Belongingness Needs
Ego/Achievement
Incentives and Temptations. A study several years ago suggested that certain
organizational factors can influence the likelihood of fraudulent and questionable
financial reporting prac-tices. Those same factors also are likely to influence ethical
behavior.
Individuals may engage in dishonest, illegal or unethical acts simply because their
organiza-tions give them strong incentives or temptations to do so. Emphasis on
"results," particularly in the short term, fosters an environment in which the price of
failure becomes very high.
Incentives cited for engaging in fraudulent or questionable financial reporting
practices and, by extension, other forms of unethical behavior are:
• Pressure to meet unrealistic performance targets, particularly for short term
results,
• High performance-dependent rewards, and
• Upper and lower cutoffs on bonus plans.
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Safety and Security Needs
Belongingness Needs
The study also cites "temptations" for employees to engage in improper acts:
• Nonexistent or ineffective controls, such as poor segregation of duties in
sensitive areas that offer temptations to steal or to conceal poor performance.
• High decentralization that leaves top management unaware of actions taken
at lower organizational levels and thereby reduces the chances of getting
caught.
• A weak internal audit function that does not have the ability to detect and
report improper behavior.
• An ineffective board of directors that does not provide objective oversight of
top management.
• Penalties for improper behavior that are insignificant or unpublicized and
thus lose their value as deterrents.
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Safety and Security Needs
Self Actualization
Providing and Communicating Moral Guidance. In addition to the
incentives and temptations just discussed, the aforementioned study found
a third cause of fraudulent and questionable financial reporting practices:
ignorance. The study found that "in many of the companies that have
suffered instances of deceptive financial reporting, the people involved
either did not know what they were doing was wrong or erroneously
believed they were acting in the organization's best interest." This
ignorance is often caused by poor moral background or guidance, rather
than by an intent to deceive. Thus, not only must ethical values be
communicated, but explicit guidance must be given regarding what is right
and wrong.
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Self Actualization
The most effective way of transmitting a message of ethical behavior throughout
the organization is by example. People imitate their leaders. Employees are
likely to develop the same attitudes about what's right and wrong - and about
internal control - as those shown by top management. Knowledge that the CEO
has "done the right thing" ethically when faced with a tough business decision
sends a strong message to all levels of the organization.
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Ethics
Incentives
Integrity
Temptations
Lack of Moral
Guidance
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Controls as a Motivator
Audio Session November, 2008
Professional Development Associates
Michael Piazza
[email protected]
Controls as a Motivator