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© Matti Mattila, CPFA, CISA, CIA |
Achievement Of Basic Objectives Of A Process
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| Effectiveness
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For the shareholders and other investors effectiveness is primary associated with
an organization's ability to yield profit.
For [some] other stakeholders effectiveness can come from things of other than monetary nature.
Anyway, resources made available to the organization should be allocated such a way
that investors and other stakeholders get best return on investment or other effect that they desire.
On a long run this is a matter of life and death to organizations,
thus a key point in corporate governance.
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Effectiveness results from right choices.
On the highest level of [big] choices we speak about strategy.
Strategic choices are made by the board or other body or by a person
with highest authority in this kind of matters.
A board acts as the representative of all owners,
and sees that top management of the organization is able to create desired results [3].
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To keep the organization pace with changing environment the board
- or other such body or person - and top management must make use of emerging opportunities.
The threshold of seizing opportunities is raised by the fact
that human beings put more stress on the likelihood of lost than the opportunity to win [4].
In addition, exploitation of opportunities depends on human beings’
character, capacity, beliefs, attitudes, intuition and so on.
Likelihood of big losses and big wins increases when risk appetite of a decision maker increases.
Risk appetite is the maximum amount of risk that decision maker is ready to accept in pursuit of value [5].
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One cannot expect that internal control is able to prevent bad decisions.
Careful design of a processes and their internal control - when building a process -
and determination of risks in internal control should, however,
makes it possible to have sufficient, relevant and reliable information [from processes]
available for decision makers.
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| Processes
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Besides decision-making another source of effectiveness are processes:
making right choices when implementing decisions of the board or other such body or person.
Processes should be designed so that they contribute optimally
to fulfilment of organization’s mission and strategy.
This matter is discussed later under subject
“Design of internal control.”
A process can be made effective and efficient in attainment of its basic objectives
by means of internal control elements.
Basic objectives are inherent objectives of a process,
e.g. preparation of financial statements with due care.
They are not [arbitrary] performance objectives or demands set to a process,
e.g. an objective to prepare financial statements by certain deadline with certain resources.
The internal control elements, when intelligently made use of,
give reasonable assurance that a process brings high output with inputs,
and outputs of optimal quality - under given possibilities and constraints.
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Well-designed internal control is no excuse for not exploiting opportunities
in order to make a process still more effective and efficient.
Processes, accounting, communication and other systems, staff and its motivation,
partnerships etc. need to be developed continuously.
Challenging realistic objectives need to be set to processes to ensure
that sacrifices will be in right proportion with the value of the output
and with the extent of the operations.
Assets need to be safeguarded from loss due to such things as abuse, mismanagement, theft, and fire.
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Quality management systems and internal control overlap to some degree.
The former help in keeping processes of the organization steady
and outputs of the processes on the pre-determined level,
and besides that, in improving processes on a continuous basis.
The very core of internal control is keeping performance or state of affairs
within what is expected, allowed or accepted.
Once created internal control keeps routines in force, although there is an element of change, too.
In internal control, according to the ECAR model,
process improvements are based on determination of risks;
in quality management systems process improvements usually have a wider range of origin.
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| Risk Appetite And Internal Control
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Risk appetite has no relevance when speaking about internal control.
Risk appetite is an element in decision-making and in risk management.
Changing risk appetite in a process - e.g. in a financial reporting process
- from appropriate to less than that is no option in practice.
There is factually no alternative to generally acceptable level of residual risk,
i.e. risk after implementation of appropriate internal control elements with due care.
More risk would lead to negative consequences in business as well as in legal proceedings.
No process can successfully fulfil its purpose taking systematically risks
that lead e.g. to compromises in quality of inputs or outputs.
And even though taking risks in processes would not be opposite to achievement of objectives,
it certainly would likely be such as regards respect of rules of the society.
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[3]
There is no guarantee that managers agree with objectives and concerns of the owners.
The interests can be in conflict. The problem is called a principal-agent problem:
a principal (owner) hires an agent (manager) under conditions of incomplete and asymmetric information.
[4]
Prospect theory by Daniel Kahneman and Amos Tversky
[5]
Modified definition of the Committee of Sponsoring Organizations of the Treadway Commission (COSO):
Enterprise Risk Management - Integrated Framework, Executive summary framework, page 19
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