CPE for Government Auditors

Is that your job? More on Control Environment

13 The next day, Moses took his seat to hear the people’s disputes against each other. They waited before him from morning till evening.

14 When Moses’ father-in-law saw all that Moses was doing for the people, he asked, “What are you really accomplishing here? Why are you trying to do all this alone while everyone stands around you from morning till evening?”

15 Moses replied, “Because the people come to me to get a ruling from God. 16 When a dispute arises, they come to me, and I am the one who settles the case between the quarreling parties. I inform the people of God’s decrees and give them his instructions.”

17 “This is not good!” Moses’ father-in-law exclaimed. 18 “You’re going to wear yourself out—and the people, too. This job is too heavy a burden for you to handle all by yourself. 19 Now listen to me, and let me give you a word of advice, and may God be with you. You should continue to be the people’s representative before God, bringing their disputes to him.20 Teach them God’s decrees, and give them his instructions. Show them how to conduct their lives. 21 But select from all the people some capable, honest men who fear God and hate bribes. Appoint them as leaders over groups of one thousand, one hundred, fifty, and ten. 22 They should always be available to solve the people’s common disputes, but have them bring the major cases to you. Let the leaders decide the smaller matters themselves. They will help you carry the load, making the task easier for you. 23 If you follow this advice, and if God commands you to do so, then you will be able to endure the pressures, and all these people will go home in peace.”

24 Moses listened to his father-in-law’s advice and followed his suggestions. 25 He chose capable men from all over Israel and appointed them as leaders over the people. He put them in charge of groups of one thousand, one hundred, fifty, and ten. 26 These men were always available to solve the people’s common disputes. They brought the major cases to Moses, but they took care of the smaller matters themselves.  

In this chapter, we will cover the remaining three principles included in the control environment component of the COSO model:  Principle 3 – structure, responsibility and authority, Principle 4 -competence and Principle 5 – accountability.

Not even Moses, God’s chosen leader, could get it done all on his own.  Taking care of everything for everyone will absolutely wear a person out.

I watched a TV biography on Jim Henson, the creator of the Muppets.   He tried to be involved in every aspect of his business – Sesame Street, an HBO series, the next Muppet movie- even as his team grew to 300 people.  He didn’t take care of himself, contracted a very common illness, and refused to slow down long enough to go to the doctor.  By the time he got to the hospital, it was too late and he died at age 53!

No, most of us don’t work under that kind of pressure, but I have made myself sick trying to do it all several times.  I have learned to delegate and to give those to whom I delegate the authority to act without checking in with me.  My late-found ability to let go allows me to spend time doing what I do best and allows me some space to rest and think.

From the Green Book’s perspective, the reason we have controls is to make sure the entity achieves its objectives.  If an entity unwisely lays too much responsible on one individual, and isn’t intentional about organizing itself and dividing and delegating the work, the Green Book points out that the entity simply won’t get where it wants to be.

3.01 Management should establish an organizational structure, assign responsibility, and delegate authority to achieve the entity’s objectives. 

3.06 To achieve the entity’s objectives, management assigns responsibility and delegates authority to key roles throughout the entity….

3.07 Management considers the overall responsibilities assigned to each unit, determines what key roles are needed to fulfill the assigned responsibilities, and establishes the key roles. Those in key roles can further assign responsibility for internal control to roles below them in the organizational structure, but retain ownership for fulfilling the overall responsibilities assigned to the unit. 

That isn’t my job!

One of the deadliest things that someone in customer service can utter is, “That isn’t my job.”  What this person and organization have failed to realize is that I, as a customer, do not give a flying rat’s patootie whose job it is, I just want my product or service with as little hassle as possible.

I recently used my frequent flyer miles on American Airlines to buy tickets on British Airways.  Big mistake.  After two hours of work booking the tickets, I found out that I had no seat assignments.  The next day, I spent another two hours getting seat assignments.  When I would ask American Airlines for help, they would pass me off to British Airways.  When I asked British Airways for help – you guessed it – they passed me off to American Airlines.

After several internet searches, a few password wrestling matches, multiple phone calls and hours of being on hold, I finally found a sympathetic ear.  Everyone else I encountered wanted to pass the responsibility on to someone else or gave me incomplete or erroneous information, but this angel stayed with me until I got the information I needed.

Who are the angels?

After figuring out what needs to be done, you have to put competent people in place to get it done.   Usually, an organization has to invest in its people to enable them to be good at their job.  My angel at American Airlines obviously had years of experience in customer care and knew exactly how to help me cut through all of the red tape and get my seat assignments.  I hope American is investing more in her.

The Green Book is clear that management is responsible for investing in its people and should not expect employees to be ready to work on their first day on the job!

4.01 Management should demonstrate a commitment to recruit, develop, and retain competent individuals. 

4.05 Management recruits, develops, and retains competent personnel to achieve the entity’s objectives. Management considers the following: 

  • Recruit – Conduct procedures to determine whether a particular candidate fits the organizational needs and has the competence for the proposed role. 
  • Train – Enable individuals to develop competencies appropriate for key roles, reinforce standards of conduct, and tailor training based on the needs of the role. 
  • Mentor – Provide guidance on the individual’s performance based on standards of conduct and expectations of competence, align the individual’s skills and expertise with the entity’s objectives, and help personnel adapt to an evolving environment. 
  • Retain – Provide incentives to motivate and reinforce expected levels of performance and desired conduct, including training and credentialing as appropriate. 

I’d love to hold customer service accountable

At the beginning of each call to the airlines, I heard “This call is recorded and may be used for training purposes.”  What I’d love the message to say instead is, “This call is being monitored by someone who will hold these customer care representatives accountable if they send you to the wrong place or give you wrong or incomplete information.”  Wouldn’t it be nice if, at the end of each interaction with a customer care rep, you could evaluate whether they helped you or frustrated you?  Is it just me, or have you noticed that the customer care reps only connect you with the evaluation when they know you are happy?

So how do you hold people accountable?  

When I teach budgeting courses, I discuss how budgets are the translation of an organization’s plan into numbers.  I emphasize that unless an organization identifies when managers are off plan and holds them accountable, a budget just becomes a silly, wasteful, paper-pushing exercise.

Through real life stories told by the participants in my classes and my own work experience, I’ve compiled a list of options organizations can use to hold folks accountable.  Here is a list of some of the options from least stringent to most stringent:

  • Send out a variance report to all managers
  • Require managers to explain variances to the accountant
  • Require managers to explain variances in writing
  • Require managers to explain variances during a staff meeting
  • Require managers to explain variances during a meeting with executives
  • Evaluate budget performance in the manager’s annual performance evaluation
  • Reprimand managers who do not stay on track with the budget
  • Withhold bonuses from managers who stray from the budget
  • Fire managers who dismiss and ignore the budget

Did you think the last one was too extreme?  A mature CFO shared with the class that every time he pushed forward a new initiative on behalf of the executive team, he made sure the executives gave him the ability to fire anyone who did not play along.  He told a story about the executive team wanting to hold managers to a tighter and very unpopular budget.  When one division director rebelled and would not follow the budget, the CFO fired him.  After that, he had no problem keeping the other managers in line.

Here is what the Green Book says about holding people accountable:

5.03 Management holds entity personnel accountable for performing their assigned internal control responsibilities. The oversight body, in turn, holds management accountable as well as the organization as a whole for its internal control responsibilities. 

The flip side of stringency

But the Green Book also acknowledges the negative, flip side of holding folks accountable.  Whatever gets measured gets done – which is a good thing… sort of.  But on the flip side, employees will occasionally do silly and wasteful things to meet expectations.

For example, I audited a manufacturer of computer components in the late 80’s.   At the end of the year, the manufacturing managers received a bonus if their inventory was minimal.  So, on December 30, the managers filled two semi trucks full of inventory and sent the trucks off to an unwitting customer in California.

The shipment was rejected by the customer on January 2 because they hadn’t ordered the components.  The trucks arrived back in Texas, full of inventory, on January 4.

The managers received their bonuses and the year-end records looked good – so on one hand, the manager’s mission was accomplished. But on the other hand, the records were misleading, the customer in California was annoyed, and the manufacturer wasted thousands on the bogus shipment.

From the Green Book:

5.04 If management establishes incentives, management recognizes that such actions can yield unintended consequences and evaluates incentives so that they align with the entity’s standards of conduct. 

5.07 Management adjusts excessive pressures on personnel in the entity. Pressure can appear in an entity because of goals established by management to meet objectives or cyclical demands of various processes performed by the entity, such as year-end financial statement preparation. Excessive pressure can result in personnel “cutting corners” to meet the established goals. 

The Control Environment Component is full of wisdom

The definition of wisdom is: the quality of having experience, knowledge, and good judgment. It is apparent that the creators of the COSO model and the Green Book have been around the block a few times and know the harm poor controls can do.

The control environment component of the COSO model tells us that what leaders do, matters; that oversight bodies have an important role to play in keeping controls strong; that everyone should know their job, be equipped to perform their job, and be held accountable for doing their jobs.

Here is a summary of the control environment component from the introduction to the chapter:

The control environment is the foundation for an internal control system. It provides the discipline and structure, which affect the overall quality of internal control. It influences how objectives are defined and how control activities are structured. The oversight body and management establish and maintain an environment throughout the entity that sets a positive attitude toward internal control. 

1. The oversight body and management should demonstrate a commitment to integrity and ethical values. 
2. The oversight body should oversee the entity’s internal control system. 
3. Management should establish an organizational structure, assign responsibility, and delegate authority to achieve the entity’s objectives. 
4. Management should demonstrate a commitment to recruit, develop, and retain competent individuals. 
5. Management should evaluate performance and hold individuals accountable for their internal control responsibilities. 

Woven into these principles are warnings that our best intentions can go awry:

  • Under the first principle on tone at the top, we are warned that well-designed controls can break down when leaders act badly.
  • Under the second principle on oversight, we are warned that management might not want to fix obvious problems and therefore must be forced to act by an oversight body.
  • Under the fourth principle on competence, we are warned that our best people can leave us, and we’d better have a plan to keep the organization going without them.
  • Under the fifth principle on accountability, we are warned that holding people accountable can result in squirrely behavior that goes against the ultimate objectives of the entity.

What’s next?

In the next chapter, we will collect all of the controls we came up with for our case study, sort them out and then evaluate them for effectiveness and cost.

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