Outskirts Press, INC.

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While the risk-and-control profession has grown in sophistication, some aspects of current practice are inconsistent with sound management decision-making and business analysis. Foremost among these is the financial evaluation of control. Simply stated, when it comes to the risk-and-control discipline, methods of financial evaluation that are routinely used for other aspects of an organization’s operations are either not used or used to a much lesser extent. Many organizations, moreover, view the effort to implement an effective control environment to be a “cost of doing business” that does not warrant the degree of analysis that is generally applied to other areas of the organization. The objective of this book is to illustrate that, despite the unique characteristics of risk and control, the discipline should merit the same degree of financial/economic analysis as is applied to other topics of comparable cost, scale, and complexity. After establishing this point, this text outlines a practical framework for evaluating risk and control from a financial standpoint. The remaining text is devoted to outlining, in a step-by-step manner, the practical methods and implications for applying the framework to a wide range of risk-and-control decision-making contexts, thus allowing the reader to understand (at least “directionally”) the guidelines and considerations for applying financial analysis to reduce costs and increase the efficiency and effectiveness of an organization’s control environment. This brief, authoritative text is truly a ‘must-have’ addition to every internal audit library.

Chapter 1 - A Financial Definition Of Control Prior to outlining a framework for analyzing control from a financial/economic standpoint, it will be helpful to develop a basic definition of control that lends itself to financial analysis and which also distinguishes the subject matter from other business activities. Before we develop a definition of controls that suits this purpose, let us first outline a general definition of a business objective, or more broadly, an organizational activity or objective. Definition of a Business Activity/Organizational Objective [from a financial perspective] For the purposes of financial analysis, an organizational activity can be defined as follows: The commitment of scarce resources (capital, labor, and/or materials) required to achieve intended favorable outcomes (such as the production of goods and rendering of services) that achieves (or supports the achievement of) a positive financial return. I understand that defining the goal of all business activities and organization objectives in strictly financial terms may be unsatisfactory to many readers, as it seems too narrow and mercenary. It is, however, an appropriate definition for the purpose of examining a financial analysis of risk and controls. It is certainly true that not all business activity is undertaken to yield a positive and tangible economic return—for example, many business activities are undertaken for altruistic reasons, such as charity or community relations, (although one could reasonably assert that there are significant economic benefits associated with the goodwill and reputational gain that accrues to an organization from these activities). However, for the sake of this analysis, we will concentrate on the broad range of activities that are driven, at least in part, by financial considerations, which is the fundamental and overarching principle in a market-based, or, for that matter, any other efficiency- or utility-optimizing model for decision-making, whereby economic gain is the most useful and uniformly applicable motivation and measure of results that can be applied to most decision-making contexts.