By Bob Swetz
Controller Consultant | Tier One Services, LLC
What is Management Override?
In an earlier post I talked about the importance of management’s attitude towards internal controls. If management has a poor attitude towards controls, the entire system can break down. Management override of controls is when a well-designed system of internal control breaks down because management doesn’t do their part in following the policy or procedure. In the AICPA publication Management Override of Internal Control: The Achilles’ Heel of Fraud Prevention, “even though internal control over financial reporting (hereinafter referred to as internal control or simply as controls) may appear to be well-designed and effective, controls that are otherwise effective can be overridden by management in every entity. Many financial statement frauds have been perpetrated by intentional override by senior management of what might otherwise appear to be effective internal control.”
An Example
Looking at the cash disbursements function, let’s assume a simple set of controls:
·        The receptionist opens the mail and gives vendor bills to the accounts payable department
·        The AP department staff enter the bills and print a report of open items for the Controller to review
·        The Controller reviews the list and attached bills and determines what to pay
·        The AP department prints the checks and gives them to the board Treasurer to sign along with the Controller’s approved list
·        The receptionist mails the signed checks
In this example, the Controller is senior management. If the controller does not properly review the list of bills to be paid along with the invoices, then unauthorized disbursements can get through. Especially if the AP staff knows the Controller will not adequately review the list.
The Danger
If even one person in the system of internal control is not performing their task adequately the system can break down. The danger with management override is that in many cases, the task performed by management is a critical step in the process. If this step is missed, overlooked or done poorly, fraud, theft and lots of other bad things can occur.
I invite you to check out my previous post What is Management’s Attitude About Internal Control and Why Does It Matter? It might help to complete the picture.
If you have questions or want to dig deeper, feel free to schedule a 15-minute troubleshooting session with me at http://bit.ly/Scheduling_Troubleshooting or connect with me on Facebook at https://www.facebook.com/bobswetzonline.

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