OBU RAP Topic 12 – Analyse and evaluate the effectiveness of an aspect of the control environment within an organisation

Overview

The control environment of any organisation reflects its values- a place where every individual can conduct his activities and carry out their control responsibilities. This environment relates to the commitment of employees to organizations’ policies and procedures and following ethical behaviours. The main aspects of the control environment may include

• Internal audit function
• Corporate governance
• Risk management

This topic requires students to identify an aspect of the control environment and then judge and access its effectiveness. What impact does this aspect have on the overall conduct of the employees and business? To better comprehend the requirements, students should gain an understanding of the various aspects of the control environment. Many distinct aspects can be studied under the control environment but the most common that are used in every company are the audit function, corporate governance, and risk management.

Organizations prosper when they establish control environments that ensure the efficient execution of business activities. When done properly, good internal controls help organizations deliver value to their stakeholders and achieve their strategic objectives while aligning with industry best practices, laws, and regulations to manage risks facing them.

Risk Assessment is a process used to identify, assess, and manage risks to the achievement of the entity’s objectives.

Control environment factors include:

• Integrity and ethical values.
• The commitment to competence.
• Leadership philosophy and operating style.
• The way management assigns authority and responsibility and organizes and develops its people.
• Policies and procedures.

Students are expected to examine and evaluate the impact of the control environment on the various aspects of an organisation. This can be done with the help of a highly qualified mentor and getting his feedback.

Key features/requirements

The key requirements of topic 12 are as follows

• Students are required to gain an understanding of the control environment
• Understanding the various aspects of the control environment
• Assessing the effectiveness of the control environment on the various aspects of the company
• Use of suitable business models to establish a well-written RAP
• Creating a link between an effective control environment and the success of the company

Key success factors for topic 12 (effectiveness of control environment)

Following are the main points that need to be considered for a successful RAP submission

• Selecting a suitable company that has a proper control environment in place
• Identification of the control environment factors being used in the company
• Identification of the various aspects of the control environment
• Establishing an understanding of the audit function
• Assessing the corporate governance of the company
• Assessing the effectiveness of the control environment on the performance of the business
• Creating a link between the control environment and the performance of the company for three years.
• Access to the internally generated information
• Permission from the management to use the internally generated information
• In-depth knowledge of all the control environment factors
• In-depth knowledge of the impact of these factors on the success of the company
• Demonstrating a clear understanding of the industry and its competitive peers
• Adequate application of the selected goals and objectives that were set at the beginning of the RAP in the proper sections of RAP
• The implementation of the correct research methodology to get good results on all the selected goals and objectives that were put in place at the beginning of the RAP
• Keeping the discussion logical by keeping all the objectives in mind
• Using reliable and appropriate sources for data gathering
• Properly referencing the information gathered according to the Harvard referencing style as told by the OBU.
• Usage of suitable business models to study various aspects of control environment
• A comparison to another organisation or the industry sector average

Business models/frameworks/concepts for effectiveness of control environment

 COSO Model of internal control:  The Committee of Sponsoring Organizations of the Treadway Commission (COSO) internal control is 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

The first category relates to an entity’s basic business objectives, including performance and profitability goals. The second relates to the preparation of reliable published financial statements, including interim and condensed financial statements and selected financial data derived from such statements, such as earnings releases, reported publicly. The third deals with complying with those laws and regulations to which the entity is subject. The framework of this model can be used to study the effectiveness of control environment in any entity that the student is working on.

Cost-benefit analysis of internal audit: Generally speaking, cost-benefit analysis is a way to ensure if a particular internal audit function applied, will it be worth the cost or not. If a company is unsure whether the effort and resources being used will be worth the impact, then this model can be applied to projected costs and benefits to analyse if they make sense to the business. There are enormous economic benefits to running these tests before taking up a major decision regarding the control environment. By doing this analysis, a company can find out the most critical information regarding the outcomes of strategic decisions like the ROI and value chain. The first step of a cost-benefit analysis is to establish a framework for analysis. Then all the projected costs and their estimated benefits are laid out. Companies should then assign a dollar value to each cost and benefit. Then tally the total value of costs and benefits and compare. If the benefits outweigh the costs, then the management should invest in the internal audit function without a second thought.

Corporate governance framework: A comprehensive corporate governance framework will address oversight of the company’s performance and the contribution to corporate success from the Board of Directors in the context of the company’s strategic goals and objectives. the relationship of the Board with the President or Chief Executive Officer. Every organisation has its framework that can be followed for effective results.

Major benefits of choosing topic 12 (effectiveness of control environment)

Apart from the increase in their knowledge, students can gain the following academic and professional advantages

• Students will get to know about the control environment and how it works
• Students will learn about the relevant companies and the industry of the selected company
• The insight will be gained regarding all the aspects of the control environment
• A detailed study regarding the company’s internal audit function and corporate governance will equip the students for their professional careers
• Students can apply their theoretical knowledge to real-world situations.
• A critical analysis of the effectiveness of internal controls will help to sharpen the required skills needed by an auditor
• This will increase the ability of the student to devise an effective control environment for the company
• Students will climb up the professional ladder if they are good in all aspects of audit

Possible limitations faced by the students while researching Topic 12

The main aim of conducting research is to set up new facts or confirm the outcomes of the previous research. It enables us to gain new knowledge regarding the subject. However, while preparing for OBU thesis research students face many problems.

General Limitations

• Research method: Students need to have a clear understanding of the research methods. Mainly the research methods are not relevant or reliable as students are not trained in different methodologies. Simply replicating the knowledge available online or from various sources is not wise. There is a lack of basic knowledge regarding the correct methods of research
• Interaction between the subject company and student: There isn’t any proper interaction between the subject company and the student. This means that a substantial amount of data going into the thesis goes untapped. The key issues of the company can only be highlighted with the help of internal company management.
• Overlapping information: overlapping information is often obtained because of excessive research through various sources. Each source has its own story to tell. Students often get confused regarding the facts and statements
• Students may not be able to get authorization to talk to the higher management and some information may not be provided due to confidentiality issues.
• Time constraints: it is without a doubt that students need to complete their RAP before the deadline hits. Sometimes, the time limit can affect the quality of RAP very negatively. Students need to acknowledge this from the very start and set a schedule to be consistent with their research.

Specific Limitations

• No permission letter: Students might not get permission to research the company since companies have no interest in getting involved with the students.
• No access to internal audit report: Internal audit report may not be provided to the students

Suitable organization for topic 12

The most suitable organization is the one which has an established control environment so that its effectiveness in different areas can be evaluated. Selecting a company which is established enough so that its effective internal controls can be studied over some time is necessary. To make a high-quality RAP, students must choose a company whose internal controls and ethical framework can easily understand by the student and can make connections between various topics. The following factors should be kept in mind while choosing a company for RAP:

• The general interest of the student in the company
• The amount of information available for the company
• Access to reliable secondary sources of information
• Familiarity with the industry sector associated with the company

Any established company from the financial services sector can be studied for this topic as they must have an internal audit function. All the credit institutions and insurance companies can also be studied.

Suggested approach for topic 12

Before starting your research, you should understand the assignment. The guidelines mentioned in the information pack should be read. The word count and length should be looked upon. What kind of sources are required by the topic, primary or secondary? The style of citation ‘Harvard referencing’ should be understood by the students. All the other requirements and directions made by the OBU must be complied with. After choosing this topic, a proper mind map must be made from the start, so the student conducts all the required tasks in a proper and timely manner. All the major requirements and aspects of the topic should be considered thoroughly so that a strategy can be devised to meet those requirements. A research methodology and all reliable websites and authentic sources should be noted down. The style of referencing must be kept in mind while researching this topic to pass the OBU RAP.

In Part 1– (Research objectives and overall research approach), Students need to make a table of contents and a title page mentioning the ACCA reg number and the selected topic. Part 1 mostly contains the introduction and the objectives of the RAP. The objectives should be consistent with the research of the project. Your personal aims and goals are not required to be a part of this section. The reasons for selecting the topic must be jotted down. The organisation which is suitable for topic 12 and why that organisation was deemed appropriate for the topic.  The aims and objectives of the project should be explained in several points. Research questions are written in detail, and it targets the specific areas that need to be researched. Usually, there are 3 or 4 research questions. Consideration of all these points is important in part 1. If you follow all these instructions, you can move very strongly ahead.

Part 2- (Information gathering/accounting and business techniques) is very important as all your understanding of the business and accountancy models is analysed here. A quality explanation of the used models or any other frameworks and analysis of all their possible limitations must be performed. The most structured way of representing section 2 is by first mentioning the sources of information that were used to acquire the data for research on topic 12. It is crucial that research on topic 12 is carried out with the help of internally generated information as it relates to the control environment. You are required to collect primary data as well. For the collection of primary data, it is essential that permission is granted from the management. A discussion of the limitations of your information gathering must be included. Students should find references to mention limitations instead of writing from their own opinion. Any ethical issues that arose during information gathering and your solutions regarding the issues. Every part should be backed up by good references. Next, you would list down all the business and accountancy models and their possible limitations. COSO model and the corporate governance framework can be chosen as the research models. To find out more about the selection of respective models for topic 12, kindly refer to section ‘Accounting and business models for topic 12’ above.  Word count is to be prioritized which is 1800-2000 words.

In part 3, there is a further evaluation, analysis and conclusion. It should contain a description of the results obtained and all the limitations. Further research with examples and comparisons between the two companies is done. It is the most critical section, and most students fail in it if they are not in the hands of an experienced mentor. Only a qualified mentor can guide the students critically to secure a passing grade. Topic 12 requires analysing and evaluating the effectiveness of controls and how they make the company better at controlling the environment.  Analysis and evaluation are done by using ratios and not absolute numbers. Merely writing the figures or absolute numbers will not be sufficient.  Ratios like liquidity, gearing, P/E ratio, profitability, and EPS movement help to critically analyse the changes taking place in the selected company.  Evaluation means that you will be extracting results from the data researched. Hence this part of RAP provides actual value and meaning to your research and RAP. All findings should be presented in a good form with the help of graphs, pie charts, tables etc. Conclusions must be made based on your research work. Recommendations to the selected company may be made but it is not very necessary. It is of utmost importance that word count must be kept in mind. If you exceed it in any way, then the examiner will not mark the conclusions resulting in failure.  4500 words must be written to ensure a detailed analysis.

Suggested Approach for SLS

The meetings with the mentor must be planned at the start of the RAP and a track of those meetings must be kept in a diary as it will help later on to write the SLS. The time required to conduct effective research needs to be calculated at the start and a timetable should be kept in place. Religiously following the requirements and keeping track of the time is necessary to pass the RAP. All the information gathered should be recorded systemically and needs to be shared with your project mentor so that complete guidance can be given to you. Consultation with the project mentor ensures that a student passes with the highest possible grade. If any issue arises it can be solved by discussing it with your project guide.

Sources of information

There are mainly two types of sources that can be used, primary and secondary.

A primary source is the first-hand source collected by the student and is very essential for this topic. In this topic, students can get the data reports from management and also conduct interviews with the employees. Surveys and questionnaires can also be devised. Internal audit documents can be used as evidence of the effectiveness of internal controls.

Secondary Information is readily available information. The annual reports and websites can provide data required for the research. The reliability and relevancy of the source must be checked.