Organizational Control Environment

An organization’s control environment sets the moral tone of the organization and includes the integrity, ethical values and competence of the entity’s employees, as well as management’s philosophy and operating style. If the tone set by management is poor; if the owners, executives and managers exhibit less-than-ethical conduct, employees at lower levels in the organization will see that such activities are tolerated and will be more likely to engage in unethical, or even fraudulent conduct. As part of establishing an effective control environment, its is highly recommended that a written code of conduct is in place, which covers all employees, but emphasizes that, while the offical policy should reflect desired conduct, corporate culture will determine what occurs. Consequently, in addition to instituting formal policies covering employee conduct, management┬ámust do the following:

  • Lead by example
  • Verbally communicate the entity’s values and standards to all employees
  • Establish and enforce penalties for improper conduct
  • Ensure that jobs are staffed by employees with requisite knowledge and skills
  • Establish appropriate reporting lines
  • Set human resources policies that ensure the organization hires, promotes and supports competent and trustworthy individuals