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Homework answers / question archive / Trans Oil & Gas Corporation (TransOG), a British company, operates four oil refineries in the United States
Trans Oil & Gas Corporation (TransOG), a British company, operates four oil refineries in the United States. Six months ago there was an explosion at one of its refineries that resulted in the death of 2 employees and seriously injured another 10. The U.S. Occupational Safety and Health Administration (OSHA) found that a cracked valve had led to the explosion. Further OSHA investigation found that there was a lack of regard for the safety of the workers on the part of management at the refineries. More specifically the agency’s report detailed the following safety issues that led to the explosion: 1) TransOG did not provide effective safety leadership and has not adequately established worker safety as a core value across its four refineries. 2) The agency found that there were instances of a lack of operating discipline, toleration for serious deviations from safe operating practices and apparent complacency toward serious process safety risks at each refinery. 3) An independent investigation conducted a year previously at two of the company’s refineries had expressed major concerns about weaknesses in safety practices. The report had been distributed to the refinery managers, but no action was taken to correct the problems. 4) None of the refineries had printed safety manuals and the managers themselves were responsible for breaches of safety procedures. 5) Finally, the agency’s report mentioned a situation where a whistleblower had reported a serious safety breach a month before the explosion. The whistleblower’s report that was presented to his immediate superior had been ignored. The whistleblower then presented the report to the refinery manager who told him to talk with his immediate supervisor. After the explosion, an investigative reporter found the report made to management by the whistleblower. The investigative reporter then wrote an article stating how TransOG had ignored the concerns of the whistleblower.
Required: A. Based on the COSO publication, Internal Control – Integrated Framework, state the objectives of a sound system of internal control.
B. Based on COSO, list and describe the main components of internal control.
C. Explain how conditions at the refineries of TransOG indicate that it did not have a sound system of internal control.
D. TransOG was further criticized because it was found that its internal auditing function was not effective. Define the function of internal auditing and explain the characteristics of an effective internal auditing function.
1) The COSO model defines internal control as “a process effected by an entity’s board of directors, management and other personnel designed to provide reasonable assurance of the achievement of objectives in the following categories:
2)
In an effective internal control system, the following five components work to support the achievement of an entity’s mission, strategies and related business objectives:
3) Trans OG has severe problems regrding its Safety and Healthy Work Environment:
> Trans OG has not adquately established Safety Norms for the Workers in all the 4 Refineries.
>Lack of Discipline towards Safety Standards and not taking any prompt action even in the case of severe Deviations from the Safety Standards.
> No Action Plan by the Refinery Managers in spite of the Adverse Remarks by the Independent Evaluators in the refineries which led to Safety Hazards through Explosion.
> Lack of Defined Safety Manuals in the Factory shows the Lethargic attitude of the Entity towards a serious issue of Worker's Sfety.
4 Functions of Internal Auditing
Characteristics of Effective Internal Audit
1)They are scheduled
Surprise audits are not welcomed by anyone. A schedule should be set and communicated to everyone, preferably at the beginning of the year. There’s no need to audit all processes at once; different processes can be audited at different times throughout the year, organizations just need to make sure that at the end of the year all processes have been audited.
2) Auditors are competent and Independent
Auditors need to demonstrate in-depth knowledge of the standard which they are auditing against and they should have an understanding of the processes being audited. They should be objective and impartial; this means that they can’t audit a process which they manage or control. Large organizations usually have a team of trained auditors, but that is not necessary; an alternative is to hire the services of an external consultant to perform the internal audits
3)They are planned
The audit needs to be confirmed with the process owner. At this stage the auditor should review procedures and previous findings or issues related to the audited process. A checklist with a pre-determined list of questions can be sought to be used during the audit; this checklist should be provided to the auditee so they have time to organize any information.
4) It’s conducted in an objective and friendly manner
An audit should start with an opening meeting with the auditor and the auditee(s). It’s recommended that the auditor works systematically through the checklist or procedure, while reviewing records, observing the process, analyzing process data and talking to employees. During the audit, the auditor must discuss the findings with the auditee before recording it.
5) Audit findings are recorded
A closing meeting with the auditee is fundamental so information is not delayed. Here the auditor should point out possible weaknesses and areas for improvement. Findings and their details (these include non-conformities, positive areas and improvement areas) need to be recorded and communicated to the auditee(s) and management.
6) Findings are monitored
The auditor is responsible for ensuring that corrective actions have been taken to fix any problems found during the audit.
