Academic journal article The Government Accountants Journal

Implementing Compliance Testing: Engaging the Managers

Academic journal article The Government Accountants Journal

Implementing Compliance Testing: Engaging the Managers

Article excerpt

Since 1990, the internal control staff of New York State's central fiscal office has been helping state agencies implement New York's Governmental Accountability, Auditing and Internal Control Act. This comprehensive legislation requires all state agencies and authorities to install systems of internal control and programs of internal control review.

Because responsibility for complying with the statute lies with the covered organizations, they have considerable flexibility in deciding on the specific review procedures they will install to assure that their internal controls are operating effectively.

At the same time, New York has insisted upon certain common features among the review systems. Especially critical is the testing of internal controls to determine whether they are followed in practice. The lesson seems clear: A system of well-designed internal control is valueless if there is widespread noncompliance with control measures through weak supervision, inadequate training, intentional subversion, management override, or other factors.

Most state agencies have installed comprehensive, productive internal control systems that have materially strengthened their internal controls. However, due in part to the perceived technical difficulty of testing procedures, this important, conforming phase of internal control reviews was not emphasized at the outset.

Early efforts to encourage the integration of testing programs into internal control review procedures stressed the brand of testing used by Certified Public Accountants during their audits. It soon became clear, however, that such an approach would be too time-consuming in light of the countless internal controls installed to manage New York State programs. Additionally, it was questionable whether New York State's internal control law required testing to meet such standards.

To bridge this gap, the central internal control staff, working with an advisory committee of state internal auditors and internal control officials, established a middle ground to compliance testing, based on several principles:

* Individual managers are best suited to test the effectiveness of their own internal controls because they are most familiar with their operations and: therefore they can best assess the risk of internal control breakdowns. (The term "manager," as used in this article, refers to the person in the organization closest to the procedure to be tested who is not, at the same time, part of its internal control system).

* Even though program managers may not be able to carry out the extensive observations appropriate to testing by a CPA, the managers can understand and apply the same professional testing methods used by professional auditors.

* Not all internal controls have a high enough priority to warrant testing and not all aspects of even critical internal controls need to be tested. Therefore, state managers should be selective in testing their internal controls.

* Even though the internal auditor can help institute testing programs in the 34 state agencies with such staffs, testing of critical agency activities in a reasonable period of time will require the participation of operating managers.

* Testing programs should employ the orderly, documented measures normally adopted to administer an internal control review program.

New York also looked to professional standards for help in constructing an effective testing program. The control activities component described in Internal Control -- Integrated Framework, by the Committee of Sponsoring Organizations of the Treadway Commission, established a standard for testing programs. Statement on Auditing Standards 55 issued by the American Institute of Certified Public Accountants (AICPA) was also instructive by stressing the importance of determining whether policies and procedures are actually being used.

Building upon these guides, New York has written and distributed a managers' handbook to spark a widescale, common-sense program of compliance testing among state managers. …

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