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How Implementing Entity-Level Controls Can Affect Governance and Culture Within Your Organization

02.15.2019

In recent years, organizational culture and how governance influences culture have become larger focuses for businesses of all sizes and industries. But when it comes to defining “culture” as part of an organization, there are a wide range of ways to define what it is and how it can be influenced. The most common concept is that an organization’s culture is comprised of the mix of attitudes, behaviors and the available systems and processes that are shared by the people within that organization. This includes people that have the same shared mission and vision of how the organization works and where it will go in the future.

Governance and Culture

Governance includes the policies and processes that influence culture by providing the framework in which it should operate. Governance essentially balances the interests of an organizations many stakeholders (such as management, customers, suppliers, financiers, employees, etc.) by providing the framework for attaining the shared objectives to fulfill its mission and vision. Governance encompasses every sphere of management, from strategic goals and internal controls to how to measure performance. It dictates the organization’s behavior.

When it comes to governance, entity-level controls that are part of the overall control environment can help management guide governance and influence culture.

Entity-Level Controls

Entity-level controls (also referred to as “tone-at-the-top” controls) help define an organization’s culture. They establish guidelines around governance and set forth an organization’s values through policies and procedures. These policies and procedures clarify the desired behavior of the organization’s employees, management team and board members. Entity-level controls are a contrast from process-level controls, which focus more on classes of transactions such as invoice payments, payroll transactions or account reconciliations.

Entity-level controls set the foundation of governance by establishing accountability for each employee, including executives and directors. The control activities include:

  • Mission, vision or values statements
  • Code of ethics and code of conduct
  • Employee handbook
  • Board of Directors policies and procedures
  • Committee charters
  • New hire onboarding and employee exit procedures
  • Performance review policies
  • Succession planning
  • Establishment and guidance of the internal audit function
  • Training
  • Compliance requirements

Benefits of Entity-Level Controls

Some of the benefits your organization may see by implementing entity-level controls include:

  • Reducing the extent of reliance on transaction-level controls
  • Increasing the effectiveness of internal controls through leveraging senior and experienced personnel
  • Better define and communicate the expectations of management across the organization (i.e., tone-at-the-top)
  • Reducing redundancy in controls performed across the organization at different levels
  • Generating efficiencies in other business and operational processes
  • Reinforcement for all stakeholders of the importance of internal controls to the success of the business
  • Better understanding of how identified risks are mitigated and the ability to redirect resources toward high-priority risk areas
  • Increased effectiveness and efficiency of management's risk assessment and controls evaluation

Ultimately, management is responsible for establishing and maintaining internal controls to achieve the objectives of effective and efficient operations, reliable financial reporting and compliance with applicable laws and regulations. It is essential that management understands the connection between its corporate culture, governance and entity-level controls.

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