PRINCIPLE 2: Fulfills Oversight Responsibility
The Board of Directors demonstrates independence from management and provides oversight of the development and performance of internal control.
Focus Points
The focus points described below highlight features relevant to this principle.
Determines Oversight Responsibilities
The Board of Directors determines and assumes oversight responsibilities against established requirements and expectations.
The Board of Directors or an equivalent oversight body (board) has the authority to hire, fire, or, if necessary, plan for a replacement general manager and someone in an equivalent position. Their role is to ensure the complete execution of the organization’s strategy, the achievement of objectives, and the effectiveness of the internal control system.
Public companies must have many committees on their boards of directors, such as Corporate Governance, Risk Management, and Audit committees. The structures and processes management creates to manage the business support the board’s oversight.
While the board of directors assumes oversight responsibility, the general manager and senior management take direct responsibility for developing and implementing internal control.
Applies Relevant Expertise
The Board of Directors identifies, maintains, and periodically evaluates the skills and expertise required of its members to enable them to ask probing questions of senior management and take appropriate action.
Composition of the board of directors
It is determined by considering the organization’s mission, values, and various distinct objectives, as well as the skills and expertise required to optimally supervise, examine, and evaluate the senior management team. These competencies include:
- Internal Control Mindset (e.g., professional skepticism, perspectives on identifying and responding to risks, approaches, and evaluation of the internal control system),
- Knowledge of the market and the organization (e.g., information about products/services, value chain, customer base, and competitors),
- Financial expertise, including financial reporting (e.g., accounting standards, financial reporting regulations)
- Expertise regarding laws and regulations (e.g., applicable laws, rules, and regulations),
- Social and environmental expertise (e.g., social and environmental expectations),
- Incentives and fees (e.g., market prevailing wages and expectations),
- Relevant systems and technologies (e.g., understanding critical systems and technology challenges and opportunities).
The expertise and independence of the board of directors are regularly evaluated, taking into account the changing and evolving needs of the organization.
It can be costly and difficult for sole proprietorships, SMEs, and non-profit companies to attract competent and independent board members. Considering this, organizations implement different processes and controls that provide oversight.
Operates Independently
The Board of Directors has sufficient members who act independently of the management and are impartial in their evaluations and decision-making.
The board of directors is independent of the organization’s management and demonstrates the necessary skills and expertise to carry out its oversight responsibilities. Independence is manifested in board members’ minds, actions, appearance, and factual impartiality. Typically, most company board members whose shares are traded on the stock exchange must be independent and have no current or recent personal or professional relationships with the organization.
Provides Oversight of the Internal Control System
The board of directors oversees management’s design, implementation, and execution of internal control.
-Control Environment-Establishing integrity and ethical values, oversight structures, authority and responsibilities, expectations regarding competence, and accountability to the board.
-Risk assessment – Monitoring management’s assessment of all risks facing the organization in achieving its objectives, including material changes, fraud, and the potential impact of management’s breach of internal control.
-Control Actions – Providing oversight to senior management in the development and execution of control actions.
-Information and Communication-Analyzing and discussing information relevant to achieving the organization’s objectives.
-Monitoring Actions-Evaluating and monitoring the nature and scope of monitoring actions and management’s assessment and remediation of deficiencies.
Resources of Internal Control Article
- International Internal Auditing Standards, International Institute of Internal Auditors
- Dr. Davut Pehlivanlı, Current Internal Audit Practices, Beta 2010
- Prof. Dr. Nejat Bozkurt, Accounting Audit, Alfa 1998
- Prof.Dr.Nejat Bozkurt, TÜRMOB Independent Audit Training Lecture Notes, 2012
- Dr.Özgür Çatıkkaş, KGK, Marmara University. Corporate Governance Lecture Notes, 2013
- İSMMMO-Practical Information for Internal Audit in SMEs, 2013
- Turkish Internal Audit Institute, www.tide.org.tr
- Alp Buluch, Article, Internal Control, Hurses, 19 March 2013
- Turkish Commercial Code No. 6102
- International Internal Auditing Standards, www.theiia.org
- Treadway Commission Supporting Institutions Committee, Internal Control-Integrated Framework, 2013
- Public Financial Management and Control Law
- Public Internal Control Standards
- Public Internal Control Guide
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