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Intelligent Controls Graphic

Designing intelligent internal control systems

by Matthew Leitch, 7 September 2004


Most of us involved in internal controls work can have a greater positive impact if we expand our knowledge of techniques for managing uncertainty beyond our traditional main-stays of sign-offs, reconciliations, and access restrictions. There's no need to invent new techniques; all we need to do is assimilate them from the branches of management where they developed.

This paper examines management techniques we can add to our tool kit of potential recommendations, the trend towards using these techniques in our work, and the special issues when we come to design internal control systems that use these more "intelligent" controls.

Intelligent control techniques improve management performance, so the potential gains are great. Intelligent controls give people a more realistic and open minded view of the future and the ability to make flexible plans in the face of multiple possible outcomes. Without this help managers tend to have a blinkered view of the future and make plans as if they know what will happen. This is made worse when the blinkers are institutionalised in management methods. That need not happen. We can institutionalise flexibility, open mindedness, and learning instead.

The intelligent controls include a variety of techniques for designing internal control systems. Making lists of risks and responses to them is just one of the alternatives, and often not the best.

Just like the traditional controls such as checks and reconciliations, the intelligent controls are only necessary because things don't always work out as we plan, desire, or expect. It is this uncertainty that makes them important, and it is the fact that uncertainty is being responded to that distinguishes internal controls from other management activities. There is work that would be necessary even in a certain world, on top of which there are internal controls that are useful because the world is not certain.

However, whereas low level controls tend to be there to "make sure" something happens as intended, intelligent controls can respond to uncertainty in a wider variety of ways. Sometimes, their purpose is to help us exploit pleasant surprises and that may mean doing something we did not intend to do initially. Whatever the response, the purpose of these intelligent controls is still to keep us in a good position despite the pressure exerted by surprises.

These activities stretch from the most mundane, everyday decisions under uncertainty made by supervisors right up to super-strategic, once-in-a-decade strategic reviews by top management. However, in practice it is the more mundane management activities that we are usually concerned with because they are plentiful and more likely to be within our grasp.

Along the way I mention some management buzz phrases like "scenario planning" and "real options", but only to show how ideas in these can be brought down to earth and applied in everyday situations, without complicated methodologies and consultants.

The single most important factor in getting good control techniques used is knowledge of them. I urge you to read about the many clever mechanisms for managing risk that have been invented. The material in this paper, and the links and references, are designed to get you started. These techniques have inspired me and I hope they do the same for you.

The trend towards intelligence
A practical example
The intelligent part of internal control systems
Some research on intelligent controls
Improving intelligent controls
Some intelligent control techniques
- Flexible plans
- Cause and effect interventions
- Learning and adaptability
- Portfolio effects: diversification and rebalancing
- Design by flexing and detailing a generic starting point
- Listing areas of uncertainty
- Explicit quantification of uncertainty
- Reporting with uncertainty
- Evolutionary project management
- Managing schedule uncertainty in projects with the Critical Chain method
- Statistical Process Control
- Story telling about the future
- Process management control
- Fault Tree Analysis and Event Tree Analysis
- Negative feedback control loops
Further information

The trend towards intelligence

We each experience major trends from a personal perspective. Here's my story. Perhaps your own is similar in some ways.

In the early 1990s, when I started a career in accountancy and external audit, internal control seemed a fairly mundane and old fashioned area. Boring even. When it came to making recommendations to clients I tried to "add value" like you're supposed to but, with rare exceptions, my output was based on a few simple control ideas, relentlessly applied. My recommendations were either to stop people from doing something, check before something was done, check and correct afterwards, or to create more documentary evidence of having done these things. Sign offs, restrictions, reconciliations - like a serious meusli my output was good for you but not very appetising.

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There's more
The whole text of this article is freely available to you without registration by just clicking the link below. Please remember that this website exists because people (perhaps including you) express their thanks for its help in practical ways, such as thinking about how to use its ideas, my services, the book, taking part in research, suggesting topics, etc. Thanks for reading this and I hope you enjoy the full article.

Full article
© 2004 Matthew Leitch
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