This report, otherwise called the “Turnbull Report” (1999), was issued with the London Stock Exchange for companies listed thereon. Nigel Turnbull was the Chair of the Committee that wrote the report; hence it is popularly called the Turnbull Report. The purpose of the report was to bring to the knowledge of directors the Combined Code and the resultant obligations of directors. These obligations are primarily concerned with ensuring that good “internal controls” are established and maintained in their companies, having audits with good checks and balances to ensure that the quality of their financial reporting is right and that the company’s system is adequate as to prevent the occurrence of fraud. The revised edition was issued in 2005 by the Financial Reporting Council.
The Turnbull Report restates as follows the importance of internal control and risk management to the achievement of corporate objectives:
1. Internal Control helps in safeguarding the investments of shareholders, as well as the company’s assets.
2. Strong internal controls enhance the company’s operational effectiveness and efficiency, help in ensuring that reporting for internal and external purposes are reliable and that there is compliance to laws and regulations.
3. Financial control that incorporates good accounting records is very essential elements of internal control. It helps to reduce the company’s exposure to financial risks while ensuring the reliability of the financial information for both its internal and external uses.
4. As an organization’s environment continues to change, the risks attendant to its operations will also continue to change. Consequently, a continued evaluation of the nature and extent of such evolving risks should be undertaken so that the internal controls can appropriately manage and control risks with a view to maximizing profit, being the reward for successful risk-taking.
Furthermore, the Combined Code prescribes the following requirements for internal control:
1. The board of directors should institute internal controls with a view to safeguarding shareholders’ investments and the company’s assets.
2. The company directors should conduct periodic evaluation of the internal control system and report same to the shareholders.
3. All the UK listed companies should comply with the listing Rules that require them to report the extent of their compliance in relation to all aspects of the Turnbull Report.
4. Internal control from the perspective of the board of directors should include all forms of control be they operational, compliance, or financial.
The Turnbull Code places responsibility for the maintenance of internal control on the board of directors and requires that the board set the appropriate policies and seeks regular assurance that the system is functioning well, and managing those risks as intended. It further states that the responsibility for the implementation of the board’s policies on risks and control is that of the company management and that management can best perform this function by identifying and evaluating the potential risks for the consideration of the board. In addition to the management, the Turnbull Code states that as part of his, or her accountability for attaining corporate objectives, every employee is expected to contribute towards the effective implementation of the internal control system. Thus to be effective, the internal control system requires the concerted efforts of the board of directors, the management, and all the staff of the organization.
Generally, the Turnbull Report (1999), revised in 2005, stated “risk assessment, control environment and control activities, information and communication, and monitoring” (pp. 13-15) are the four components of an internal control system. In assessing the effectiveness of the risks and internal control processes, the Code recommends some questions that the board and management should consider and discuss depending on the particular circumstances of the company. Answers to the questions, which are framed in relation to each component, suggest the effectiveness or otherwise of each of the components, hence taken together, the effectiveness or otherwise of an internal control system.