Internal control systems are central to how managers safeguard public resources, measure performance, and meet accountability expectations. Auditors must understand these systems to assess whether agencies are positioned to achieve their missions and protect taxpayer funds.
This lesson is a preview from Graduate School USA's Manager’s and Auditor’s Roles in Assessing Internal Control Course.
Management Accountability
Internal control is at the heart of accountability for our nation’s resources and how the government uses them. Government employees hold positions of public trust—they use taxpayer funds to accomplish results on behalf of the taxpayers. Such positions carry obligations and expectations; government employees are obliged and expected to explain their actions and accomplishments while using the public’s resources.
This concept of accountability is documented in numerous laws. Public managers entrusted with public resources are accountable both to the public and to other levels and branches of government for the resources provided to carry out government programs and services.
“Areas vulnerable to fraud, waste, abuse, and mismanagement must be continually evaluated to ensure that scarce resources reach their intended beneficiaries; are used properly; and are not diverted for inappropriate, illegal, inefficient, or ineffective purposes.”
— U.S. Government Accountability Office
Accountability for resources has two aspects: stewardship and performance.
Financial Stewardship Accountability
The budget is a financial plan that sets forth how much money can be spent and for what purposes during specified periods of time. Stewardship accountability focuses on what resources have been used, how they have been used, and when they were used. It reflects the expectation that managers are responsible for ensuring that:
- Public funds are used in compliance with laws and are effectively and efficiently used for their intended purpose.
- Revenues and expenditures are properly recorded and accounted for.
- There is adequate security over funds and other assets to safeguard them against fraud, waste, loss, theft, and unauthorized use.
- Programs are managed with integrity, transparency, and in compliance with applicable laws.
- Financial statements are complete, accurate, and reliable.
- Grants and contracts are managed with integrity, ensuring proper expenditure of funds and compliance with laws, regulations, and specifications.
Performance Accountability
A performance plan identifies the goals, programs, activities, and resources required to accomplish an objective. Performance accountability focuses on how well resources have been used to achieve specific, measurable outcomes. The emphasis is on efficiency and effectiveness in carrying out the agency’s operations. Managers are expected to be responsible for:
- The results and cost of programs.
- The quality and timeliness of performance.
- Meeting customer expectations.
- Managing risks.
Performance Measurement
Management is accountable for all aspects of the agency’s performance—from providing the initial input of funds and other resources to achieving desired outcomes. A key element within each aspect is a set of meaningful measures that can be used to continuously monitor, improve, and demonstrate the agency’s efficiency and effectiveness.
All government resources and related programs (input) exist to carry out a mission and achieve a specific purpose. A program’s purpose is achieved through the entity’s operations and the production and delivery of outputs—goods and/or services. These outputs are expected to satisfy customer needs and achieve the program’s ultimate purpose or outcomes.
A presumed causal relationship exists between the links, or aspects, of the performance chain, and performance measures apply to each aspect.
Performance Categories
The components involved in achieving a program’s purpose are often referred to as performance categories. An agency’s success in meeting its program purpose can usually be traced to performance in any one of these categories. For accountability and internal control purposes, the operations category and the measurement of all performance aspects are especially relevant.
Operations
Operations include the many processes and controls an organization uses to produce outputs, from budgeting, to acquiring resources, to producing products and services, and delivering them to customers.
Processes
Processes involve people acquiring material resources and using technology to transform those resources into outputs, and to deliver those outputs to customers.
Controls
Controls are the tools used to ensure that processes achieve their intended results in a timely, efficient, and effective manner.
Performance Indicators
Performance indicators are the metrics within the performance categories that management reviews to determine success. They are distinct characteristics of performance, such as quality, quantity, timeliness, efficiency, productivity, price or cost, or customer satisfaction. Some indicators are readily measurable (e.g., timeliness), while others are more difficult to quantify (e.g., fraud).
Management Functions Require Internal Control
Achieving an agency’s mission, goals, and objectives involves five basic management functions. Internal controls are essential to effectively carrying out all five functions.
Planning
Defining the entity mission and its products and services and selecting performance goals and objectives. This includes determining resource needs and establishing policies and procedures for achieving the goals and objectives.
Organizing
Establishing a structure of roles, positions, and activities required to achieve plans and goals, grouping activities, assigning activity groups to managers with defined authority, and allocating resources to the groups.
Staffing
Filling the positions provided for by the organization structure with talented individuals capable of achieving high performance.
Directing / Leading
Guiding, influencing, motivating, and supervising the work of staff toward task accomplishment.
Controlling
Observing and measuring performance, comparing performance to goals and standards, assessing the significance and cause of variances, and taking necessary action to correct problems and capitalize on opportunities.
What Are Controls?
Laws, regulations, and literature often use the terms “management control,” “management controls,” “internal control,” and “internal controls” interchangeably. There is no single authoritative definition of internal control, and your agency likely has its own definition. Agencies may also distinguish between a control (a single measure) and controls (the system of measures).
Why Are Controls Needed?
Over the past several years, Congress has taken steps to fundamentally change how federal agencies operate. These changes were driven by widespread management problems that required governmentwide solutions and by public demand for improved performance at lower cost.
Some common problems that have inhibited the achievement of expectations include:
- Basic management functions needing improvement; lack of management direction and leadership.
- Billions of dollars and valuable or sensitive assets are lost due to fraud, waste, and mismanagement.
- Obsolete or inefficient systems that fail to provide complete, consistent, reliable, and timely information.
- Need for fundamental reform in financial management requirements, practices, and systems.
- Current and future operating costs are not fully identified or available.
Effective internal control is key to achieving agency missions and program results through improved accountability. Identifying internal control weaknesses and taking corrective actions are essential to creating and maintaining a strong internal control infrastructure that supports the achievement of agency objectives.
Numerous laws emphasize the importance of maintaining effective internal controls and improving performance results. These laws—and the standards and guidance derived from them—provide managers with a framework for establishing and assessing the effectiveness of internal controls, the most notable being the Integrity Act of 1982.
What Are the Benefits of Effective Internal Control?
Effective internal control can benefit an agency in various ways, including:
- Improved mission and program accomplishment
- Greater accountability, both stewardship and performance
- More efficient operations
- Higher levels of customer satisfaction
- Better protection and earlier detection of issues
- A proactive rather than reactive management approach
- Better safeguarding of agency resources
- Greater openness to outside scrutiny (transparency)
- Demonstration of commitment to integrity and credibility