Question

You have been assigned to analyze the accounting information for a Fortune 500 corporation. From the e-Activity, evaluate which tools you would use to analyze its business processes, indicating your rationale. On the other hand, resources, such as accountants, business analysts, and I/T specialists who rely on documentation tools, will need proper training on these tools. You have been given the responsibility of familiarizing your team with these tools. Evaluate which techniques, in terms of their appropriateness, you would use to get your team ready for its first assignment—the evaluation of a firm’s internal control structure.

Answer 1

Business process mapping, a part of Business Process Management (BPM), is a framework used to create visual representations of work processes. Business process maps show the relationship between the steps and inputs to produce an end-product or service, such as when a product goes through packaging or when an employee’s leave is approved. This process of documentation is concerned with what a business does, why it does what it does, what the standard is for success, who is responsible, and when and where different steps will occur. Business process mapping promotes transparency, not only for those within the company but for all stakeholders, especially those involved in compliance. Business process mapping is part of project planning for a range of project types, from improvement projects to more intensive business process re-engineering projects. Business process reengineering is the drastic redesign of the entirety of the enterprise’s processes. Some businesses chose to map their processes because they are conducting strategic planning, or are developing metrics for reporting. Organizations use business process modeling for different reasons, but primarily it’s a formal approach to quality management. Overall, businesses want to become more effective, so when all of the company objectives are measured and compared, it becomes possible to align them with your company’s values and capabilities. With aligned objectives, your organization can behave as a single entity with interconnecting parts, which significantly increases the value of your end-product or service. Other purposes of building business process maps include:

• Process standardization
• Employee onboarding and training
• Process improvement
• Communication
• Compliance with regulating agencies
• Internal auditing

These following principles should be present in every mapping project:

• Define the scope of the project itself, with the boundaries, start, and end points.
• Look at the big picture - the intent of the process.
• Define each step clearly.
• Get feedback from everyone in your organization who is involved in the process.
• Strive to be complete in your accuracy, especially with the map of the “as-is” process.
• Strive to keep the sub-processes simple.
• Test the process with accepted metrics. Metrics should measure the time, volume, rates/costs, equipment, and any added value.
• Work from output to input, backward.
• Create ownership with single points of contact where feasible.
• Redesign processes to be customer-centric.
• Use technology to enable your processes.
• Decrease inefficiencies in the hand-offs.

The following is a useful framework.

1. Identify your organization’s best practices: As in the principles of good business process mapping, your organization should agree on what is mapped and the scope of each. The process should be easily understood as mapped by someone who is not close to it. Each process should also have a series of questions posed to it that answer why it is being done and what goes into each detail of it. Finally, apply metrics as a basis for measuring the success of each process.

2. As-is in process design: Specifically define the purpose of mapping the process. Ask where the process initiates and ends, and determine what the opportunity of fixing it could become. After selecting a process, determine all the steps in it, as well as inputs and outputs. Establish the systems, roles, and time involved. Select a mapping technique. Interview the contributors for the roles they play in the process, looking at every duty and decision point.

The following are the specific criteria that you are looking for in every process:

• Responsibilities
• Objectives
• Activities
• Inputs
• Outputs
• Customers
• Risks and controls
• Key performance indicators

3. Analyze and evaluate: Review your process map. You are looking for processes that are redundant, delays and unnecessary steps, vagueness, bottlenecks, points of rework, and flows that continually pass back and forth between certain people. Determine a measure for each segment, and where exactly to implement it. Identify the appropriate people to review the map. Select a process improvement plan. Process innovation analyses should consider Steven Shapiro’s 7 R’s of process innovation:

• Rethink
• Reconfigure
• Resequence
• Relocate
• Reduce
• Reassign
• Retool

4. To-be in process design: Document the process, emphasizing any problem areas. Using the best practices developed in Step 1, document the differences in the existing and new processes. Use a root cause analysis to ferret out potential problems.

The various tools used at present in management accounting may be classified into the following groups:

1. Based on Financial Accounting Information

• Analysis of Financial Statements through Ratio Analysis.
• Analysis of Financial Statements through comparative statements, trend, graph and diagram.
• Fund flow and cash flow analysis.
• Return on capital employed techniques.

2. Based on Cost Accounting Information

• Marginal costing (including cost volume profit analysis).
• Direct or incremental Costing and differential costing.
• Standard Costing.
• Analysis of Cost Variances.

3. Based on Mathematics

• Operations Research.
• Linear Programming.
• Network analysis.
• Queing theory and Games Theory.
• Simulation Theory.

4. Based on Future Information

• Budget and Budgeting.
• Budgetary control: Analysis of Budget Variance / Revenue Variance.
• Business Forecasting.
• Project Appraisal or Evaluation.

5. Miscellaneous Tools

• Managerial Reporting.
• Integrated Auditing.
• Financial Planning.
• Revaluation Accounting.
• Decision making Accounting.
• Management Information System.

Internal Control Structure is highly important for achievement of proper operational goals, reliable and relevant information and compliance with laws and regulations.

Internal control structure as a system, structure, or process is implemented by a firms board of directors, management and other personnel, intended to provide reasonable assurance about achieving control objectives in the following categories:

1. Effectiveness and efficiency of operations
2. Reliability of financial reporting
3. Compliance with applicable laws and regulations

At the organization level, internal control objectives relate to the reliability of financial reporting, timely feedback on the achievement of operational or strategic goals and compliance with laws and regulations. At the specific transactions level, internal control refers to the actions taken to achieve a specific objective (e.g., how to ensure organizations payments to third parties are for valid services rendered).

Internal control procedures reduce process variation, leading to more predictable outcomes. Internal Control Structure is important for all types of organization to achieve its objectives. Because, if a proper Internal Control Structure is implemented, all of the operations, physical resources, and data will be monitored and under control, objectives will be achieved, risks will be minimized, and information output will be trustworthy. On the other hand, if the Internal Control Structure is weak and unsound, the firm’s resources may be vulnerable to loss through theft, negligence, carelessness, and other risks.

As a result, the Accounting Information System will likely generate information that is vulnerable, untimely, and perhaps unrelated to the firm’s objectives.

Steps to Effective Internal Control

The internal control process has five components:

1. Internal Control Environment
2. Risk Assessment
3. Internal Control Activities
4. Information and Communication
5. Monitoring

Internal Control Environment

Internal controls are likely to function well if management believes that those controls are important and communicates that view to employees at all levels. If management views controls as unrelated to achieving its objectives, or even worse, as an obstacle, this attitude will also be communicated. Despite policies to the contrary, employees will then view internal controls as "red tape" to be "cut through" to get the job done. An effective internal control environment:

• Sets the tone of an organization influencing the control consciousness of its people

• Is an intangible factor that is the foundation for all other components of internal control, providing discipline and structure
• Describes "organizational culture"
• Includes a commitment to hire, train, and retain qualified staff
• Encompasses both technical competence and ethical commitment

Risk Assessment

A risk is anything that endangers the achievement of an objective. Always ask: What can go wrong? What assets do we need to protect?

• Risk assessment is the process used to identify, analyze, and manage the potential risks that could hinder or prevent an agency from achieving its objectives.
• Risk increases during a time of change, for example, turnover in personnel, rapid growth, or establishment of new services.
• Other potential high risk factors include complex programs or activities, cash receipts, direct third party beneficiaries, and prior problems.

Internal Control Activities

Organizations establish policies and procedures so that identified risks do not prevent the organization from reaching its objectives.

• Clearly identified activities minimize risk and enhance effectiveness.
• Internal control activities are nothing more than the policies, procedures, and organizational structure of an entity.
• Controls can be either preventive, for example, requiring supervisory approval, or detective, for example, reconciling reports.
• Avoid excessive controls, which are as harmful as excessive risk and result in increased Bureaucracy and reduced productivity.

Information and Communication

To be useful, information must be reliable and it must be communicated to those who need it. For example, supervisors must communicate duties and responsibilities to the employees that report to them and employees must be able to alert management to potential problems.

• Information must be communicated both within the organization and to those outside, for example, vendors, recipients, and other constituents
• Communication must be ongoing both within and between various levels and activities of the organization.

Monitoring

After implementing internal controls, organizations must monitor their effectiveness periodically to ensure that controls continue to be adequate and continue to function properly. Management must also revisit previously identified problems to ensure that they are corrected.

Auditors use employee interviews to determine how well individuals are trained for their jobs. The interviews can also shed more light on how well business owners and managers educate employees on the importance of safeguarding business operations. Auditors may ask employees what is their job responsibility, how do they protect the company’s business and financial information, have they been given a manual outlining the company’s standard operating procedures and who is responsible for reviewing the employee’s completed work.

Employees are responsible for complying with internal controls by:

• Successfully fulfilling the duties and responsibilities established in their job description;
• Monitoring work to ensure it is done properly and that errors are corrected promptly;
• Meeting applicable performance standards;
• Taking all reasonable steps to safeguard assets against waste, loss, unauthorized use and misappropriation;
• Adhering to all applicable policies and procedures;
• Attending education and training programs to increase awareness and understanding; and
• Reporting breakdowns in internal control systems to their supervisor or manager.

Managers and supervisors are responsible for executing control policies and procedures within their departments by:

• Maintaining a positive office environment that encourages internal controls,
• Documenting policies and procedures that are to be followed in performing office functions,
• Identifying the control objectives for each function and implementing cost effective controls designed to meet those objectives, and
• Regularly testing the controls to verify they are performing as intended.