Question

Is having an ethical culture important to having an effective system of internal control? Why or why not?

Are one or more of the fundamental principles found in codes of conduct more important than the rest? Why?

Answer 1

Yes, the ethical culture is an important component to have an effective system of internal control. Ethical culture is covered under the control environment requirements given by COSO.

Ethical Culture of a company is important because it sets the tone of the internal culture and is really important to have an effective internal control system within the organization. Ethical culture refers to the organizational policies and procedures and in what manner they appreciate good ethical behavior and how they penalize and demotivate unethical practices by employees.

One of the most important factors in setting the ethical culture of an organization is its top management and how they perceive their own and others ethical/ unethical practices.

Let's take an example to understand it much better, if in any organization if the top management itself is inclined towards unethical practices to gain benefits from their customers and then it is likely that the subordinate employees will also resort to unethical practices and bypass the internal controls. Whereas, if the top line sees unethical practices seriously and takes strict actions against them, then it will build a good ethical culture in the organization and everyone is more likely to adhere to the internal controls and procedures.

Therefore, the ethical culture is really important to have an effective system of internal control.