CA Sanjay Joshi, ACCA (UK), DISA, DIRM

Internal Control Framework – Design & Implement an SOP

Executive Summary:

♦Whether it is about growing business or cracking recession, one of the critical success factors is to design & implement an Internal Control Framework that is a best fit to management approach and attitude, business needs and regulatory demands. Internal Control Framework comprises of control environment, internal audit and control procedures. Internal Audit is a control check over control functions / control procedures.

♦SOPs align business goals, support robust MIS for decision making, and avoid process breakdowns / system failures / business interruptions. SOP establishes transparency; ensures independent review of business functions and secures stakeholder confidence.

♦SOPs being control procedures shall be clear and complete guidance material, short, simple and unambiguous. To make it effective, efficient and prompt, Any SOP shall at least Comprises of the following;

  • A document control MAP
  • Table of contents
  • Framework of SOP – it contains purpose, structure and acronyms
  • General Procedures – These are general procedures common for all the functions of the organization and it comprise of Value drivers (like vision, mission, goals etc.) and Organizational controls like Policies and Authority matrix. It refers to a tabular matrix that summarizes authorities delegated to the personnel / designators of the organization. Following table illustrates an Authority Matrix.
  • Specific Procedures – These are detailed procedures for activities (sub-processes) for a Mega function. Each procedure contains a reference to owner, objective, scope, responsibility, key risks, key control matrix and a flowchart.
  • Process Flowchart – It depicts the graphical flow of the procedure, Ref. Appendix – 1. To explain a flowchart an example is given for the procurement function (Mega function) and indenting (being sub-process).

♦Some of the Key Contents of SOP are Authority Matrix, Key Risk, Key Control Matrix and Flowcharts.

♦In recent times, SOP is a part of the Information Infrastructure and therefore, SOPs (Processes) are as dynamic as the business itself.

♦Survival of the fittest rule also applies to the Organizations and businesses. It is the people that govern the organization/business but it is the process that let the organization or business survives in economical ups and downs.             

Internal Control Framework – Design & Implement an SOP

Internal Control Framework:

In general, a growth of business outperforms organizational issues / barriers. However, in times of recession, if organizational issues / barriers remain un-controlled, it takes the breath of the business and what lasts is insolvent proprietor or promoter and a bankrupt or a defunct company. Whether it is about growing business or cracking recession, one of the critical success factors is to design & implement an Internal Control Framework that is a best fit to management approach and attitude, business needs and regulatory demands.

Internal Control Framework refers to Internal Control Systems for internal business operations and Financial Reporting Systems for stakeholder interaction. Internal Control Framework comprises of control environment, internal audit and control procedures, depicted hereunder;

Control procedures are also known as standard operating procedures (SOP), manuals, business processes, quality assurance procedures etc.

 

Value drivers of Control Procedures:

Various objectives of Control procedures (SOP) include

–          To align goals of various business functions to that of the business as a whole,

–          To adopt robust MIS system that supports decision making in dynamic business environment,

–          To avoid process breakdowns / system failures / business interruptions,

–          To achieve transparency and ensure independent review of business functions.

–          To gain stakeholder confidence in the corporate governance system

Model SOP:

SOPs are basically control procedures; it shall be designed to provide clear and complete guidance for the functions and shall be short, simple and unambiguous. The standard content of SOP varies depending upon the nature of industry / business, regulatory aspects, size of operations, nature of the function within the business etc. However, to make it effective, efficient and prompt, Any SOP shall at least Comprises of the following;

1.       Document Control MAP – It refers to a MAP that documents the issue history of the SOP to control the version of the SOP being referred.

2.       Table of contents – It lists down the contents of the SOP.

 

3.       Framework of SOP – Framework comprises of introduction, value drivers policies & authority matrix.

 a.       Purpose: It defines the purpose of the function 

b.      Structure: The structure of SOP includes general and specific procedures. General procedures refer to value drivers, policies and authority matrix, while Specific procedures refers
c.       Acronyms / Glossary: it list down the acronyms used in SOP.

4.       General procedures – These are general procedures common for all the functions of the organization and it comprises of Value drivers (like vision, mission, goals etc.) and Organizational controls like Policies and Authority matrix.

i.Value drivers: It shall include vision, mission, goals, roles and responsibilities, organization structure, organization chart for the business function.

1.    Vision – It is organization specific vision statement for the function which shall be in line with the vision of the organization.
2.    Mission – It is organization specific mission statement for the function which shall be in line with the mission of the organization.
3.    Goals – It is organization specific goals to be achieved by the function which shall be in line with the business goals of the organization.
4.    Role & Responsibility – It outlines roles and responsibilities of personnel involved execution of the function with regard to achievement of vision, mission and goals.
5.    Organization Structure – It gives a written description of the organization structure and reporting hierarchy of the function with the overall organization structure for the organization as a whole.
6.    Organization Chart – It portrays organization structure and reporting hierarchy of the function as a chart.

 

ii.          Policies: It shall include key definitions, scope and applicability, objective and policies for a specific business function.

 iii.          Authority Matrix: It refers to a tabular matrix that summarizes authorities delegated to the personnel / designators of the organization. Following table illustrates an Authority Matrix w.r.t. procurement function;

Description of activity

Limits

BOD

MD

Purchase Committee

CFO

Head Procurement

Head Others

Approve SOP

 

Y

 

 

 

 

 

Review SOP

 

 

 

Y

Y

Y

Y

Approve Indents

 

 

 

 

 

 

Y

Approve Requisition

 

 

 

 

 

Y

 

Approve Urgent Procurement

 

 

Y

 

 

 

 

Evaluation and approval of Quote and vendor selection

 

 

 

Y

Y

 

 

 

Y

 

 

 

 

 

Y

 

 

 

 

 

 

5.       Specific Procedures – These are detailed procedures for activities (sub-processes) for a Mega function. Each procedure contains a reference to owner, objective, scope, responsibility, key risks, key control matrix and a flowchart.

Mega Function Heading – It describes mega function.
P.1.             Mega Process Heading – It is an identification / name / description of mega process performed in the procurement function
Owner It defines an owner for the process. Owner is responsible for the process.
Objective It describes the purpose of the procedure.
Scope It defines the applicability / coverage of the procedure.
Policy It refers to policies – guidelines specific to the process.
P.1.1.       Sub Process Heading – It is an identification / name / description of process / sub-process performed for Mega process
Procedures Stepwise description of activities performed by the personnel to perform the process / sub-process. It servers like a work instruction which matches with the job descriptions of the individuals working for the function.
Responsibility It defines the responsibility of the personnel (resource) involved in the execution (activity) of the procedure along with performance indicator.
                Resource

Activity

Performance

Indicator

   
Key Risks A description of key risks of the process.
Key Control Matrix

 

A description of key controls to mitigate key risks. It comprises of control documents, control registers, control reports and control masters. Following is key control master helps performance monitoring for the process.
Document Format Purpose Owner Frequency
         
Registers Format Purpose Owner Frequency
         
Reports Format Purpose Owner Frequency
         
Masters Format Purpose Owner Frequency
         
Best Practices List of best practices related / relevant to the procedure.

 6.       Process flowchart – It depicts the graphical flow of the procedure, Ref. Appendix – 1. To explain a flowchart an example is given for the procurement function (Mega function) and indenting (being sub-process).

Information Infrastructure and SOP:

Organizations and MNCs have been extremely competitive in terms of establishing an Intangible Information Infrastructure and it has been accepted as one of the core competencies for the success of the business model in almost any industry may it be automobiles or an FMCG or banking or a retail business. In such times, SOP is a part of the Information Infrastructure and therefore, SOPs (Processes) are as dynamic as the business itself. In recent times, Organizations have designed SOPs that asks the customers / investors to interact with the organization, evaluate the value propositions of the organization and make their decisions.

Conclusion:

Survival of the fittest rule also applies to the Organizations and businesses. It is the people that govern the organization/business but it is the process that let the organization or business survives in economical ups and downs.

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