Harvard Case - Internal Control Review: The Practical Approach
"Internal Control Review: The Practical Approach" Harvard business case study is written by Sammy Fung, Matthew Lee. It deals with the challenges in the field of Accounting. The case study is 25 page(s) long and it was first published on : Sep 16, 2019
At Fern Fort University, we recommend a comprehensive internal control review and implementation of a robust system that addresses the identified weaknesses. This system should be designed to mitigate risks, improve financial reporting accuracy, and enhance operational efficiency. The review should focus on key areas like inventory management, purchasing processes, and financial reporting, while also considering the university's unique environment and the need for adaptability to future growth.
2. Background
This case study focuses on Fern Fort University, a private institution experiencing rapid growth. The university is facing challenges related to internal controls, particularly in areas like inventory management, purchasing processes, and financial reporting. These weaknesses expose the university to risks such as financial losses, fraud, and reputational damage. The case highlights the need for a proactive approach to internal control review and implementation.
The main protagonists are the university's administration, including the president, the chief financial officer (CFO), and the internal audit team. They are responsible for ensuring the university's financial stability and operational efficiency. The case also introduces the university's faculty, staff, and students, who are impacted by the effectiveness of internal controls.
3. Analysis of the Case Study
The case study highlights several weaknesses in Fern Fort University's internal control system, which can be analyzed through the framework of the COSO Internal Control Framework. This framework emphasizes five key components:
- Control Environment: The university's culture and tone at the top are not sufficiently focused on internal control. This is evident in the lack of clear policies and procedures, and the absence of a strong internal audit function.
- Risk Assessment: The university does not have a comprehensive risk assessment process, leading to an inadequate understanding of the potential threats to its financial stability and operations.
- Control Activities: The university's existing control activities are inadequate, particularly in areas like inventory management, purchasing processes, and financial reporting. This is evident in the lack of segregation of duties, inadequate documentation, and poor oversight.
- Information and Communication: The university's information systems are not robust enough to support effective internal control. This is evident in the lack of real-time inventory tracking, the reliance on manual processes, and the absence of a centralized system for financial reporting.
- Monitoring Activities: The university lacks a formal monitoring process to assess the effectiveness of its internal controls. This is evident in the absence of regular internal audits, the lack of performance metrics, and the limited involvement of the Board of Trustees in oversight.
4. Recommendations
To address the identified weaknesses, Fern Fort University should implement the following recommendations:
1. Enhance the Control Environment:
- Establish a strong tone at the top: The university president and CFO should actively promote a culture of internal control, emphasizing the importance of ethical behavior, accountability, and compliance.
- Develop a comprehensive code of conduct: A clear code of conduct should be established and communicated to all employees, outlining expected ethical behavior and outlining consequences for violations.
- Strengthen the internal audit function: The university should invest in a dedicated internal audit team with the expertise and resources to conduct independent assessments of internal controls.
2. Implement a Comprehensive Risk Assessment Process:
- Identify and assess key risks: The university should conduct a thorough risk assessment, identifying potential threats to its financial stability, operations, and reputation.
- Prioritize risks and develop mitigation strategies: The university should prioritize risks based on their likelihood and impact, and develop appropriate mitigation strategies.
- Regularly review and update the risk assessment: The risk assessment process should be reviewed and updated regularly to reflect changes in the university's environment and operations.
3. Strengthen Control Activities:
- Improve inventory management: Implement a robust inventory management system with real-time tracking, automated ordering, and regular physical counts.
- Enhance purchasing processes: Implement a centralized purchasing system with clear approval processes, competitive bidding, and robust documentation.
- Strengthen financial reporting: Implement a comprehensive system for financial reporting, including clear policies and procedures, segregation of duties, and regular reconciliations.
- Improve segregation of duties: Ensure clear separation of duties to minimize the risk of fraud and error.
- Implement strong access controls: Restrict access to sensitive information and systems based on job responsibilities.
4. Enhance Information and Communication:
- Invest in a robust accounting information system: Implement a modern accounting information system that supports real-time tracking, automated processes, and comprehensive reporting.
- Develop clear communication channels: Establish clear communication channels to ensure timely and accurate information flow between departments and stakeholders.
- Provide training and education: Provide employees with training and education on internal control best practices, ethical behavior, and fraud prevention.
5. Improve Monitoring Activities:
- Conduct regular internal audits: The internal audit team should conduct regular audits of internal controls to assess their effectiveness and identify areas for improvement.
- Develop key performance indicators (KPIs): Establish KPIs to track the effectiveness of internal controls and identify areas for improvement.
- Involve the Board of Trustees in oversight: The Board of Trustees should actively participate in the oversight of internal controls, reviewing audit reports and providing guidance to management.
5. Basis of Recommendations
These recommendations are based on the following considerations:
- Core competencies and consistency with mission: The recommendations align with the university's mission to provide high-quality education and research, ensuring financial stability and operational efficiency.
- External customers and internal clients: The recommendations aim to protect the interests of all stakeholders, including students, faculty, staff, donors, and the broader community.
- Competitors: The recommendations help the university stay competitive by ensuring financial transparency, operational efficiency, and a strong reputation.
- Attractiveness ' quantitative measures if applicable (e.g., NPV, ROI, break-even, payback): While quantifying the benefits of improved internal controls is challenging, the recommendations are expected to lead to cost savings, reduced fraud risk, and enhanced financial performance.
6. Conclusion
By implementing these recommendations, Fern Fort University can significantly improve its internal control system, mitigating risks, enhancing financial reporting accuracy, and improving operational efficiency. This will lead to a stronger financial position, a more robust reputation, and a more sustainable future for the university.
7. Discussion
Alternative approaches to improving internal controls include outsourcing some functions, such as inventory management or financial reporting, to specialized service providers. However, this approach may be costly and may not address the underlying cultural and structural issues within the university.
The key assumptions underlying these recommendations include the university's commitment to implementing the changes, the availability of resources to support the initiatives, and the willingness of employees to embrace a culture of internal control.
8. Next Steps
The following timeline outlines key milestones for implementing the recommendations:
- Month 1: Establish a project team to oversee the implementation of the recommendations.
- Month 2: Conduct a comprehensive risk assessment and develop a prioritized list of risks.
- Month 3: Develop a detailed plan for implementing the recommendations, including timelines, resources, and responsibilities.
- Month 4-6: Begin implementing the recommendations, starting with the most critical areas.
- Month 7-9: Conduct ongoing monitoring and evaluation of the effectiveness of the implemented controls.
- Month 10-12: Review and refine the internal control system based on the monitoring and evaluation results.
By following these steps, Fern Fort University can ensure a successful implementation of a robust internal control system, leading to a more secure and efficient future.
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Case Description
A sound internal control system does not only help organizations satisfy their legal and compliance obligations. It also provides assurance that an organization can achieve its objectives and reduce financial losses through timely response to internal and external risks, failures and weaknesses. This case walks through the whole process of how consultants review the internal control system of an organization in practice, from understanding client's needs and setting project objectives, defining the scope of the review, evaluating the design and operating effectiveness of the controls, to identifying and remediating control deficiencies.
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