Control Environment
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Risk Assessment
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Control Activities
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Information & Communication
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Monitoring
Integrity & Ethical Values • Board of Directors • Management’s Philosophy & Operating Style • Organizational Structure • Financial Reporting Competencies • Authority & Responsibility • Human Resources
Aligning Incentives with Ethics and Values Articulates Values Monitors Adherence Addresses Deviation
A 250-employee forest products company structures its bonus plan to have 30% of the potential incentive award directly related to demonstration of the company’s core values. Specific comments on how management does or does not reflect values are captured through upward feedback mechanisms. During the employee performance review and appraisal process, management provides feedback about the extent to which each employee has performed in accordance with the company’s core values of sound integrity and ethics.
Promoting a Commitment to Ethics Articulates Values Monitors Adherence Addresses Deviation
A designer and marketer of men’s and women’s sportswear with $125 million annual revenue promotes its commitment to ethical behavior through making its code of conduct readily available to all employees and third parties on its website, and requiring employees to review the code and sign a confirmation stating whether he/she has read it and is in compliance with its provisions. The code of conduct contains clear information on how to report a policy violation through an independent third party.
Promoting Employee Participation in Identifying Misconduct Articulates Values Monitors Adherence Addresses Deviation
A food distribution company with $400 million annual revenue promotes reporting of misconduct by providing an anonymous help line for its 600 employees to report potential fraud occurrences and other ethical concerns, without fear of reprisal. The company engages a third-party service provider to proctor the help line. Potentially illegal acts or financial reporting improprieties reported through the help line are communicated directly to the general counsel and audit committee.
Taking Actions When Deviations Occur Articulates Values Monitors Adherence Addresses Deviation
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A shoe company with 14 locations established a policy addressing serious improprieties, where in specified circumstances (cash embezzlement, for example) the employee’s access privileges to the facilities and IT systems are suspended temporarily and a full investigation launched. Where the impropriety is confirmed, the company terminates the employee, permanently revokes all access privileges, and files formal charges with appropriate authorities. After documenting the situation and its resolution, the HR manager is required to analyze the underlying root causes, and implement any additional remedial steps needed to avoid similar occurrences.
Internal Control over Financial Reporting – Guidance for Smaller Public Companies • Volume II : Guidance