The basic concept of internal control as a tool of the accountancy profession was developed after many business failures during the great depression and finally set out formally in accountancy literature around 1948. Its entire theory rests upon the premise that one out of every two persons is honest and will not fall into temptation. Thus the basic rule of internal control (among many other lesser ones) is that no one person should be in complete charge of a single transaction from its beginning to its end.
Ideally one person initiates or authorizes a transaction and another executes it. More than two persons may be involved in more complex transactions but at a certain point involving too many individuals in the process of approval results in the dilution of control until it becomes a false control and no one is accountable.
Therefore there normally should be no less than two persons, nor more than 3 or 4 involved in transaction processing and approval.
Where am I going with this long lesson in Internal Control 101?
The bottom line is that sound internal control depends upon the innate honesty of at least 51% of the persons…in the case of a government, 51% of its employees…in the case of a nation, 51% of its citizens.
If the culture of a business, a government or a nation is such that at least 51% of the persons in it are not honest, then the entire concept of internal control collapses.
When the theory internal control was developed at the midpoint of the 20th Century this was a fairly safe assumption in many of the “developed” countries of the world. That appears to no longer be the case in any country.
Internal control is really only possible where at least the majority of the persons exercising it are capable of, and in practice exert self control (i.e. are virtuous). Without personal self control, there can be no internal control within an organization.This also was a fairly safe assumption at mid-point of the 20th Century in many of the more developed countries. Likewise, it appears to no longer apply.
Notwithstanding, we still try to implant internal controls in financial management systems and in many other activities. But we hit a stone wall when we assume that 51% of the persons involved are capable of, and practice self control, and thus are honest enough to “blow the whistle” or disapprove the transaction of a person who possesses no such control.
The sad fact is that collusion overrides internal controls every time. Therefore the following conclusions may be drawn:
* Where self control is limited of nonexistent among persons, internal control cannot function.
* Where collusion prevails among a group, internal control fails.
As a result, the weaker the internal/self control, the greater the need for unpleasant, but necessary, external controls in the form of laws, regulations, auditors, investigators, police, justice systems and punishment. The greater the circle of collusion, the greater the need for forceful, even militaristic, external controls.
There is at present a worldwide weakening of internal/self controls…almost a contempt for virtuous living. Therefore we are seeing a weakening of the concepts of popular democracy and an upsurge in authoritarianism…fertilized and fortified by a quite natural eruption of corruption.
Christ taught self control by living a completely self controlled life. His followers, especially St. Paul, taught self control as a fundamental tenet of Christianity. What happened to it?
