Tone at the Top
It refers to the organization's design of effective internal controls
The tone at the top refers to the organization's design of effective internal controls. These internal controls must have top ethical management working proactively towards establishing top moral culture.
Creating an ethical culture includes management emphasizing ethics and integrity for organizational success.
Internal controls are a functioning system/process that reasonably ensures that the entity achieves goals and objectives. These goals and objectives are related to operations, reporting, and compliance.
The tone at the top is a component of the control environment which refers to the organization's management philosophy and risk tolerance, including integrity, ethical values, and the environment of operations.
The control environment includes the organization, board of directors, management, and competence. The senior management's responsibility is to establish the tone at the top and proper ethical culture.
This starts with the top management, the board of directors, and the organization's owner. The top management drafting and directs actions and policies is the highest level, accountable for the tone at the top.
And, it's of great importance that they should follow these policies, standards, and procedures. For them to go against these lay, the foundations for ethical management should be of utmost importance in the internal controls.
What is Tone At The Top?
The tone defines the level of commitment by the top management and the board of directors to have an honest and ethically-correct corporate culture.
When the top-level management within a business behaves in a manner that is not ethically favorable to the corporate culture, the middle/lower-level managers and the employees below them are more likely to behave similarly.
This is a critical element of an organization's system of controls. In addition, this element supports a robust foundation for rules.
Dishonesty, corruption, double-dealing, and other unethical activities should be disliked and despised by the upper management and shouldn't be involved in any. Their inclusion or indulging may make the juniors repeat their actions.
With the upper management or immediate senior and supervisors reckless in their ethical allegiance, employees will go against the ethical standards, assuming this is the way it is, resulting in more fraudulent activities. Juniors tend to mimic the behaviors of seniors.
The control environment recognizes that people run businesses and create a culture and environment. The control environment addresses the factors of tone at the top. The control environment components acknowledge the core of any organization- The people.
The control environment is about their attributes such as integrity, ethics, and confidence. The control environment components include:
- Tone at the top
- Policies and standards
- Segregation of duties & critical accounting functions
- Documenting control policies
The top management's attitude towards internal controls. Integrity and competence of management, employees, and management style.
Top management refers to the executive level of management responsible for decision-making. And this level of management has the most authority and leads the organization.
It's easier said than done. But, we understand that with great power comes great responsibility. The top management is responsible for setting ethical and moral standards and leading by example.
They, the top management, are the highest managers based on the hierarchical order of the organization. In larger businesses, these are generally the managers in the corporate office.
In smaller businesses, these are generally the managers who own the company or have the most influence on business decisions.
The top management focuses on the mission and vision of the organization. This management level strategizes how the organization should accomplish its goals and objectives.
The top management plans the procedures, duties, responsibilities, regulations, and systems. They are also responsible for setting objectives for the staff to achieve.
The common top-level management includes:
- Chief Executive Officer ( )
- Chief Financial Officer (CFO)
- Chief Operating Officer ( )
- Company's President
- Company's Vice-President
With so much power and authority, the top management is also responsible for setting ethical standards. They should ensure proper segregation of duties among the activities so they don't overlap and provide potential perpetrators to commit fraud or embezzlement.
The organization should demonstrate commitment to integrity and ethical values and uphold them. Management should establish and demonstrate a moral tone at the top through actions.
The board of directors should demonstrate independence from management. And exercise oversight development of internal controls and monitoring them.
The management establishes board oversight, structures, reporting lines, and appropriate authorities and responsibilities to achieve objectives, including integrating organizational systems and services.
The commitment of top management attracts, develops, and retains competent individuals according to the alignment with organizational objectives. Therefore, establish standards, policies, and procedures to hire and retain qualified employees.
They assess the competencies, create development plans, and address skills and competencies deficiencies. These plans should consist of training, hiring, and outsourcing. In addition, they are planning and preparing for turnover and succession.
Tone At The Top and Internal Controls
In 1990 the "Harvard Business Review," the concept of tone at the top was the first term used. The article pointed out that the success of the companies is heavily linked to sharing common values and the importance of honesty and ethics.
The integrity of the business is the responsibility and duty of top management, deciding if the pressure increases or decreases down the hierarchy. Therefore, what happens at the top levels will eventually affect the lower levels.
The tone at the top is the organization's ethics and values. For example, suppose there is no acknowledgment of honesty, decency, and punctuality. The employees may then be tempted to act unfavorably toward the organization's culture.
Naturally, the employees turn their backs on the organization's policies, ethical standards, and procedures if they don't see them being practiced by their seniors and managers.
On the other hand, if the employees believe in honesty, that may result in better decision-making. In addition, promoting trust and decency in the organization will make the management and employees proactive in protecting the firm from fraud and misrepresentations.
Having a set of ethics and values will help shape the mind and practices of the employees. In addition, this atmosphere helps to prevent errors, frauds, misrepresentations, and misstatements.
Combining internal controls with tone at the top helps to ensure ethical behavior and reduces the chance of ethical conduct. In addition, if the employees are committed to ethical behavior, the employees will likely detect or report such behavior.
The primary purpose of the tone at the top is to ensure that the culture of a corporation is set up appropriately. This appropriate set-up refers to clearly stated values. And that these values are communicated to the employees.
Conflicts could arise throughout the company if one/many individuals don't follow values and ethics. Training and educating employees helps a great deal in enlightening and illuminating their minds and consciousness.
Even if the policies and procedures aren't clear to the employees, they know well how things should be done without tampering or hampering the procedures.