Tax structures in selected Latin American countries, 1990-2009

While many organizations in the past were often isolated, with their markets local or restrained by limitations in communications and transportation, the typ-ical organization today operates in a more complicated and often global environ-ment. However, those organizations in the past “good old days” were affected by many similar attributes even though things traveled at a much slower pace.

For example, as early as the 1880s, the price of grain in Kansas was influenced by grain prices in the Ukraine and in Argentina. It took a few days for that price information to travel to the market in Kansas and much longer for grain to actu-ally be transported to these other markets, but they each were influencing fac-tors. Similar examples can be found going at least back to Roman times. Today, speed of communications and such factors as the Internet have just increased this environmental complexity.

Modern environmental factors include economic, competitive, technologi-cal, polititechnologi-cal, and social matters. They should be in the mind of an internal audi-tor when attempting to understand why management does or does not take some action. For example, economic factors, including dimensions of the state of world, national, and regional economies, can have a major influence on an orga-nization. When thinking about an organization and its business processes, an internal auditor might raise a series of questions such as: Who uses these prod-ucts and why? How strong is that demand in terms of other needs? Where are the users of the product? Are there other, competitive products or services?

There are also factors relating to the supply of the product or service. Where do the materials come from that are needed to produce the aforementioned prod-ucts, and what is their availability? What kinds of facilities are needed and what kind of production processes are involved? What are the requirements in terms of capital, specialized knowledge, and marketing? Finally, factors relating to demand and supply must be considered in terms of whether there are acceptable profit potentials.

Economic factors have an impact on all organizations, whether a private-sector industrial corporation, a not-for-profit service organization, or a govern-mental unit. For example, United Parcel Service (UPS) in the United States has largely taken over small parcel delivery from the U.S. Postal Service due to UPS’s ability to provide better service at a lower cost structure. The U.S. Postal Service, once a virtual monopoly, could not effectively compete when faced with these economic factors. An internal auditor should always consider the role of economic, competitive, technical, and even political factors when performing internal audits in an organization. That understanding will be valuable for a bet-ter understanding of management needs.

This discussion of environmental factors has been from the standpoint of the entire organization. However, management entities also exist at lower levels, including subsidiaries, divisions, departments, and the like. The environmental factors previously discussed also include the authority and controls of the higher organizational levels, to which lower-level management entities are accountable. Also included are the resources available from upper-level manage-ment that augmanage-ment and better define the environmanage-mental factors as well as con-straints of various kinds that may be imposed by the senior-level management.

In addition to these environmental factors, an internal auditor also needs to understand other key attributes that help to define the overall process of man-agement. Some of the more important of these include:

• Dependence on People. People are the most important resources the effec-tive manager must utilize. They are important in terms of their knowl-edge, skills, and experience, and have a unique importance that goes far beyond those considerations. An effective manager is directly dependent on people to implement plans through their definitive actions. Thus, an internal auditor must understand how people, or the human resources of an organization, can operate in an effective manner to provide a maxi-mum contribution toward the achievement of managerial goals and objectives. As part of understanding an organization’s human resources, management has a continuing challenge to find the best possible fit and integration of individuals within overall organizational goals. These human resources range from senior management to the support staff in an organization. Each has its own general interests, motivations, and needs; management needs to understand these factors to best utilize human resources.

• Focus on Decision Making. Managerial action is based on various types of decisions with some at a very high level, such as a major new line of busi-ness, while others are at relatively lower levels. All have common ele-ments in their decision-making process with respect to decision principles and methodology. The problem must be identified, alternatives explored using all information available, and a decision made on the action to be made. This decision-making process is similar for managers at all levels, and only differs due to the magnitude of the problem, the extent to which information is available, the available decision alternatives, and the potential risks associated with the decision outcomes. The factors of time, risk levels, and costs all affect this management process. The effective manager should survey these issues, identify the most significant issues, and then attempt to make the best decisions. Internal auditors should fol-low this decision-making process to help assemble the correct supporting data when making a recommendation. This will also help the internal auditor to better understand how management reacts to audit report find-ings and recommendations.

• Effect of Risk Level. There are risks associated with every management decision. If a wrong decision is made, there may be the risk of increased costs associated with that wrong decision, including wasted resources, diminished future performance, or even legal liability for the organiza-tion or the responsible manager. To a considerable extent, risk can be reduced by better management information about operational and envi-ronmental factors. Of course, every decision would be risk-free if the manager had what is hypothetically called perfect information. There are costs associated with obtaining the various types and levels of informa-tion desired, and probability factors will affect the desired results. As a result, total certainty is impossible because of both practical and absolute

limitations. This means that management decisions reflect the levels of risk deemed to be acceptable to the particular responsible manager. Man-agers and their overall organization have varying appetites for risk, and each manager must make evaluations within the parameters of decision authority and risk preferences. The effective internal auditor should have a good understanding of this risk assessment process. Chapter 5, “Under-standing and Assessing Risks: Enterprise Risk Management,” discusses the entire process of evaluating risk in the context of the COSO Enterprise Risk Management (ERM) framework. In order to understand manage-ment’s needs, an internal auditor also needs to understand managemanage-ment’s willingness to accept or avoid risks.

• Management Is Judged by Results. Virtually everything a manager does is judged by how those actions further the achievement of established orga-nization goals and objectives. Managers should be primarily interested in results as opposed to letting an intermediate process be an end in itself.

This attribute of judging overall management effectiveness has been a rationale for some hostile management takeovers. Corporate raiders have taken over many otherwise successful companies with the argument that they could achieve better short-term financial results by selling off under-performing assets and undertaking other restructuring actions. Although an organization might have been considered otherwise successful, these raiders promised better results and often took over the organization and then reported improved short-term results. There are always decision variables that cannot be fully predicted or adequately evaluated. As a result, the merits of some managerial decisions may be controversial, and managerial excellence is measured by the quality of its results. Internal auditors should be aware of these issues when attempting to understand management’s needs. If management wishes to achieve the best results for the overall organization, the auditor should attempt to support and corroborate those decisions.

• Time Span for Appraising Results. Judging management by its results raises questions as to the time frame in which those results are to be eval-uated. A manager often can achieve short-term results such as improved profitability even though those decisions will undermine longer-run profits. For example, quality can be temporarily sacrificed with resulting short-term profits, but this action can be so damaging to customer satis-faction that future products are no longer purchased. Good managers should think in terms of the longer term and resist the often-tempting shortcuts that endanger longer-term potentials. When management understands this, the correct decision should be clear. However, the eval-uation may be complicated by how long of a time span should be allowed for decisions made today and how willing stockholders are willing to wait for longer-run rewards. A further complicating factor is the diffi-culty of measuring long-term effects. Managers often innocently make bad estimates in these areas or are victims of wishful thinking. In other cases, lower-level managers ignore long-term consequences because they

will not be directly involved when final outcomes become evident. There are many published accounts of this practice, where a manager achieves short-term results at a unit and because of those results either is pro-moted or leaves to join a different organization. The successors must deal with the long-term results of these short-term decisions. Auditors can often play an important role in this short-term versus long-term results decision process. An internal auditor frequently identifies operational issues that may have long-term negative implications even though the short-term results are not nearly as obvious.

A central truth of management is that conditions are always changing. A val-ued employee leaves the organization, a new invention makes existing practices obsolete, consumer preferences shift, or something else unforeseen develops. As a result, many dimensions of the management process must be reappraised or redi-rected. An organization’s capacity to foresee such possibilities and to adapt to them is a measure of its ability to survive and prosper. This adaptive approach often takes a rather unstructured management style. At the same time, however, there are needs for standardization and regularity, including effective internal control processes.