Business and Management Paper
Question 2(a)
Discuss the elements of a sound internal control system as defined by COSO and using information from the case to assess any potential improvements to JPA Plant Hire’s internal control systems.
According to the Committee of Sponsoring Organizations, COSO framework. There are internal factors that must be given much attention by any organization as a whole to be able to realize effectiveness in their activities and become successful. They discussed five elements of a sound internal control system include;
Control environment; This element is regarded as the pillar of any sound internal control system. It is the foundation of the other four internal control systems elements. Failure to have a sound control environment would mean that there’s no risk assessment or even communication in an organization. The environment control element, as part of the internal control system, demands an organization’s management to take up the responsibility of creating a culture within the organization that highly respects the policies and regulations put in place to meet the organization’s objectives (Makgatho, K. E., 2013, 499). All the policies and regulations required to run a business are followed in a company when there’s a proper control environment. The top management is responsible in creating a culture within an organization by first themselves leading by example. It requires that the management abides by the required integrity levels, the ethics of doing business through upholding all the ethical values, and creating a competitive environment for the employees that ensure they meet the company’s objectives (Fourie, H. & Ackermann, C., 2013, 21). In the case of Jim Paul Associate, the company owner seems to have fallen short of this element, which is clear since there’s no clear culture in terms of following business policies and regulations. For instance, the absence of health and safety training program which has resulted to recklessness in operation. The resulting consequences are physical injuries and even absentees at work that limits the man power needed at work. All these rooting from a lack of a structured control environment within JPA.
Risk assessment; Every type of organization faces some type of risk. Even though the type of risks may vary but they all require an almost similar way of address. The role of risk assessment in any organization is to recognize and assess any likely source or form of risk that might pose a threat to them achieving their objectives as a company (Fourie, H. & Ackermann, C., 2013, 22). The risk is then worked on as per the risk management procedures. The risk management approaches might involve risk avoidance, where measures to avoid the risk are adopted to completely deviate interacting with that form of risk, risk sharing or even risk acceptance. All this is reliant on the culture set in the organization. With the lack of proper organization culture in place, JPA faces a substantial amount of threat not to able to handle some types or risks in case they occur. The lack of a health and safety training procedure for instance means that the company’s ability to handle physical risks resulting from health and safety related dangers is crippled. For instance, the accident that might cost Aaron Lennon his full potential to walk is a clear proof on the risks the lack of health and safety training has cost JPA. The lack of urgency in responding to the accident really damages the company’s reputation to some extent. Getting reach on a first aid kit took much longer, to later realize that it wasn’t equipped enough to help in a first aid procedure. JPA objective to offer hire services of their machineries is affected when their employees stay away from work due to sustained injuries that could be managed.
Control activities; These are the policies and procedures put in place by an organization, with regard to the endorsement, authentication and also verification of the main organization’s activities to ensure smooth running of day to day activities. This helps protect a company’s assets. Plus enable segregation of duties carried out at all levels from the top management to common employees, in order for them to be able to meet the set goals and objectives (Fourie, H. & Ackermann, C., 2013, 23). This element ensures that business policies and regulations are abided by. For instance, the lack of clear segregation of duties within JPA hire, where any one can operate a machinery or equipment even without prior training and experience exposes the short comings with regard to the COSO internal control system to effectively manage an organization. This deficiency seems to deprive the company its full potential of service delivery.
Information and communication; To effectively execute the internal control procedures, information and communication serves as a vital tool in realizing the set objectives. Communication is key for the success of any company; it allows sharing of intrinsic information within the organization. The management is able to receive information on what’s happening on the ground to be able to come up make decisions and later administer instructions that ensure effective pursue of the set goals and objectives. Stakeholders from the outside are also relayed extrinsic information regarding the operations of the company they are associated with. In the case of JPA hire, the owner has set a conducive environment where there seems to be a good relationship with the employees. This can help a great deal in information and communication procedures that could help improve the organization’s performance. The employees are in a great position to share information with the management that could be aid in giving directions about day to day activities, considering the level of freedom portrayed by the organization culture in terms of routine operations.
Monitoring; In order for the management to be able to gauge the performance of an organization, monitoring is required. This element aids assessment and follow up of all the issues of concern to the internal control process. This is achieved through constant monitoring and of the daily operations and the system as a whole. Daily supervision of a company’s activity facilitates assessing of the quality of the company’s operation. In the case of JPA, it is kind of cumbersome to tell an accurate level of performance they hold. This is due to inappropriate segregation of duties and also failure to abide to business regulations. The fact that the company owner considers business regulations as just some rules set to limit other players in business, is a clear indication of failure to adhere to business regulations.
Potential improvements to JPA Plant Hire’s internal control systems
Basing on the owner’s sentiments, that his company has the ability to deliver machineries and equipment anywhere regardless of the access mode, proves the potential JPA holds in effective performance. They have the potential to improve on the element of control environment. If the owner was able to initiate a patriarchal type of setting in JPA, he can influence the whole team of employees to adhere to policies and regulations. This would have laid a foundation for the rest of the internal control system elements to perform effectively. Control environment is considered a key pillar with regard to a sound internal control system. With a culture that’s obedient to business policies and regulations, there will be segregation of duties and that will enhance the risk assessment element. JPA have the potential to improve in the area of risk assessment considering the owner can easily initiate a conducive control environment. This will enable them to observe health and safety procedures that will eliminate physical risks like accidents, that the company has the ability to handle.
Question (2b)
Discuss and evaluate two risks facing JPA Plant Hire as a result of the control systems and culture.
With regard to the internal control system prevalent at JPA, they are exposed to quite a number of threats. With organisational risk management procedures, the main risk management assumption made is that risk arises both externally or internally (Brewer, S., 2018). Considering the organisational culture at the company, they risk facing these two types of risks.
Compliance risk; Compliance risk comes as a result of an organization’s failure to obey existing business laws and regulations of doing business. Failure to adhere to these rules come with severe consequences both financial and legal. From JPA’s way of operation it is clear they risk facing the compliance risk consequences. Their failure to adhere to health and safety policies where there are no clear restrictions regarding health and safety conduct plus health and safety response tells more about this risk. However, it is still manageable as the owners just needs to take the intuitive and ensure that employee compliance measures are put in place.
Reputational risk; A complaint by one of the clients regarding the conduct of one member of the staff, where the customer complained that the member of staff gave some offensive remarks poses a reputational risk to the organization. It is obvious that an employee represents the image of an organization thus they are required to conduct themselves accordingly in line of duty. Reputational risk posses a threat to the company. They risk losing that customer who might result in other customers shying off JPA services. Resultantly this might cause substantial loss of income and the company’s market share.
Question 5(a)
Explain the meaning of integrity under the ACCA code of Ethics and its importance in professional relationships such as those described in the case.
Under the Association of Chartered Certified Accountant, ACCA, code of ethics, integrity is used to imply honesty, fair dealings and truthfulness in line of duty for all certified accountants. It requires that an accountant not only practice honesty but also be straight forward in both professional and business associations (ACCA., 2018, 274). Integrity plays a key role in the code of ethics among accountants as it ensures that individuals carry out their accounting duties observing honesty. It also prevents recklessness in the professions, controlling professionals from publishing misleading o false data in their associations. In the case of John Eastwood, the undisclosed expense in question by Ruth, a placement student, should have been disclosed and made clear in the audit records. Ruth is demanding to know about the transaction since it is part of the ACCA code of ethics, surprisingly John Eastwood seems uncomfortable with her pursue. In this case, he senior engagement partner is clearly in breach of the accounting standards. Such conducts of failing to disclose details of transactions creates irregularities in records giving misleading information.
Question 5(b)
Criticise John Eastwood’s ethical and professional behaviour in this case
In line with the fundamental principles of ethics for a professional in John Eastwood’s position, he has clearly fallen short in upholding those principles. Mr. Eastwood can be said to lack integrity. These elements require one to be straightforward and honest in their line of duty, be it in a business transaction or a relationship involving work (ACCA., 2018, 274). He fails to disclose the 85,000 pounds transaction where abouts and eve the explanation given lacks credibility as he doesn’t provide proof of the said transaction. The fact that he doesn’t disclose it until it is discovered through an audit proves he has breached the integrity principle. John Eastwood is not straight forward in his dealings, and he even doesn’t want to genuinely respond to the inquiries made by Ruth, a student under the firm’s placement program.
John Eastwood lacks objectivity; the objectivity principle demands that one doesn’t in anyway compromise the professional judgement or decision to be made because of bias or unwarranted influence. In this case, he makes sure the 85,000-pound transaction case is closed. That means the audit team will make judgements and recommendations regarding the organisation some of which will be based on that unexplained transaction. That will result to unclear and misleading information regarding the audit process.
He can also be regarded to somewhat lack professional competence. Him not being open about an undisclosed dealing, his way of expression towards the student in the placement program, evidently state his lack of professional competence in that context. As he doesn’t act with diligence as demanded by the professional standards expected for someone in his position in the company.
John Eastwood’s professional behaviour is worth questioning. He fails to abide by the laws and regulations as far as code of ethics requires. His conduct somehow opens up discredit opportunity to the accounting profession by his effort of making sure that the audits work with figures he knows are not credible, which will give forth false and misleading statistics, that is a reckless approach to accounting.
Question 5(c)
Critically evaluate the alternatives that Alan Ellis has in his ethical dilemma
Allan Ellis is faced with a situation where he just realized that his senior who is also a friend, John Eastwood, has breached some professional and ethical thresholds expected from him. It is regarded as an ethical dilemma since to offer a solution he has two or more conflicting choices to pick from. He is to decide whether to make a decision that’s of common good for his personal interest (Figar, N., & Đorđević, B., 2016, 346). From the alternatives at hand, Allan Ellis choice to make a decision that befits the common good context, means he has made a choice that will benefit the organisation and all the employees as a whole. Ethically that is regarded as the right choice. With this alternative, he discredits the fact that the man in question is a close friend and a senior. Allan Ellis is expected to challenge his superior the right way and make him aware of the breach of his fiduciary duty as a profession. His failure to come open about a transaction is a show of dishonesty. The advantage would be, he would have addressed the issue justly and also helped uphold the organisations reputation. However, he might have risked ruining the existing personal relationship between him and John Eastwood, as they are close friends.
The second decision to make is, act in a way that puts his personal interests first. Like any other human being, it is obvious Allan Ellis decision to act in line with his personal interest would mean covering up for his friend to salvage their relationship. That implies that, he won’t take the initiative to address the irregularity performed by John Eastwood. The good thing about this choice is that it would save their friendship. They won’t be in bad terms. But the adversity in line would be the recklessness brought up by John Eastwood won’t be addressed. That will be creating a culture of dishonesty in the organisation, considering he is a man in higher ranking position. With that in mind, they would have fallen short of the ACCA ethical standards.
References
ACCA., 2018. Code of Ethics and Conduct. Guide to the ACCA Code of Ethics and Conduct, Section 3, PP. 259-531
Brewer, S., 2018. Organizational Risk Register. Organizational Risk Management. Progress Report. Leicestershire Fire and Rescue Service. Protecting Our Communities
Figar, N., & Đorđević, B., 2016.Managing an Ethical Dilemma. University of Nis, Faculty of Economics, Republic of Serbia, Economic Themes, 54(3): 345-362
Fourie, H. & Ackermann, C., 2013.The Impact of COSO Control Components on Internal Control Effectiveness: An Internal Audit Perspective. Journal of Economic and Financial Sciences | JEF| July 2013 6(2), pp. 495-518
Makgatho, K. E., 2013. Effectiveness of Internal Control Mechanism in Monitoring Financial Resources at the Gauteng Department of Education.