Turkey: Internal Control And Institutionalization

Last Updated: 9 September 2016
Article by İzel Levi Coşkun

One of the expressions we hear rather often in business world is "think global".

This expression may be considered a reference to benefiting from global opportunities, being open to novelties and going beyond local markets however the first thing to do is to build the system on sound institutional ground and make it controllable to allow for necessary openings and healthy growth, be it global or not. The keyword here is "control". Nothing beyond one's control shall belong to one in the long run.

The word "control" has become a part of each and every aspect of our lives. Controlled crossing, losing control, internal control, control panel, control director, control group, out of control, control system, control point... These are what come to my mind at first thought...

I have asked in a recent interview how family businesses in Turkey are doing in the crisis compared to foreign companies. Considering that most companies in Turkey are family businesses I believe that the institutionalized ones will always have some competitive advantage over others. An institutionalized institution shall be able to identify its current and future risks well. Such enterprises have internal control systems that connect with each principle of institutionalization.

I believe that corporate governance has four major principles and I will use a summary of OECD's corporate governance1 principles to make my point:

  1. 1- Fair Management
  2. 2- Accountability
  3. 3- Responsibility
  4. 4- Transparency

The above criteria shall be "sine qua non" for companies that desire to institutionalize and are in direct relationship with and active and efficient "internal control system".

Is internal control the enemy within or the perfect friend?

Indeed, not having an internal control system may cause an enemy within. I would like to talk about how we can make friends with internal control.

First of all, internal control is a process, that is in relation with the above corporate governance criteria and is designed to provide reasonable assurance regarding the achievement of objectives of the enterprise and is effected by an entity's board of directors, management and other personnel.

The purpose of internal control is to identify errors when they are minor and before they turn into big problems to protect the enterprise against external and internal risks through ensuring

  1. Reliability of financial statements / reporting,
  2. Effectiveness and efficiency of operations, and
  3. Compliance with applicable laws and regulations.2

As its definition suggests, internal control is a process and its existence at an enterprise has direct impact on risk management. Since internal control is a process it requires patience. As we have been offering this service at our company I shall be able to say from experience that establishing an internal control system requires at least 6 months of work.

On the other hand, the internal control system to be built shall be subjected to uninterrupted supervision and the internal control criteria booklet to be prepared must be revised in accordance with the changing economic conditions and needs of the company. What needs to be done here first is to try to get a picture of the internal control system. Risks should be identified and put in an order of priority. Interviews should be held with key persons during risk identification; if available, their job descriptions should be examined and their position and powers within operation should be determined. Work flow charts should be prepared. Reporting responsibilities and information and document flow for each operational process should be described in the work flow charts. If available, the enterprise's internal control criteria should be reviewed. An internal control map for the enterprise should be prepared to determine the risks existing practices are exposed to. The next step shall be to revise internal criteria if they exist or to create them if they do not. Opinions of the management and operation officials shall be sought at each of these stages and each procedure shall be implemented if all relevant persons agree.

On the other hand, the biggest problem regarding the matter is attitude. Business managers are generally quite satisfied with the family order they have established. Even if the business is not running very smoothly, the boss is not willing to change the status quo which the second generation somewhat wishes to change. If indispensible open transactions are involved too, the system is tried to be controlled using notes written on small pieces of paper. Some mistakes will be skipped and some will be spotted for various reasons but the solutions to be found cannot go further than saving the day, they cannot be permanent. If businesses show signs of growth managers start to have nightmares about "how" to handle it. Years are spent sitting on a bomb called risk without knowing what tomorrow's problem will be. Until this system which you think is being controlled fails due to an economic crisis, a bank, Treasury or a competitor...

The attitude adopted by business owners is generally as I have explained above. It is very clear that a disease is in question but nobody knows where to start to cure this disease. And, I have said earlier, change is not very warmly welcome in these cases. The same system –or lack of a system- has worked for years and the company survived, that is all that matters...

If a desire exists to take a step towards changing such attitude that dominates most family businesses, the place to start may very well be the internal control system. An internal control system affects all operations of a company including financial affairs, supply-chain management, personnel transactions, correspondence, meeting management and budgeting. The internal control system has five components.

The control environment is the foundation of the components of internal control. The control environment factors involve elements such as ethical values, employee competence, philosophy of management, method of working, delegation of responsibility by the management, organization and development of employees, interest and direction by the board of directors.

Risk assessment shall be divided into two parts as internal and external risks. Internal risk assessment is related to the identification and analysis of risks that are directly associated with the realization of the company's objectives and creating a substructure for managing such risks. External risk management on the other hand refers to having a structure that can identify and study risks that may result from system changes as economic, industrial, legal and functional factors change in time.

Control activities refer to all policies and procedures which ensure that directives given by the management are fulfilled. These may consist of different activities such as approvals, agreements, operational performance assessment, protection of assets and task distribution. Preventive, corrective or detective measures can be put in place for these.

Information and communication refer to the identification, storage and communication at the right time of information required for individuals to fulfill their tasks within a certain time period. An information technology system to be put in place within the context produces reports that cover information on financial, functional and compliance that are necessary for the establishment to carry on business and be controlled.

Supervision refers to constant supervision of the system from the aspects of performance and position against changes. Factors such as novelties in the establishment and economic changes require that the operation of the internal control system is continuously adapted which constitutes the major reason for the dynamic nature of internal control systems.

I would lastly like to briefly discuss the concept of "internal auditing" which is often confused with "internal control". Enterprises can form and internal control unit if they prefer to be closed. Internal auditing on the other hand refers to the controlling of the system by this unit or by an independent auditor. If BASEL II had been put into force, rating agencies would evaluate active internal control formation by enterprises as a factor that would increase credit ratings although as I have defended back when this issue was being discussed, setting up an active internal control system should be considered a requirement to increase enterprises' competitive power, identify risks on time and ensure smooth operation rather than an obligation. Putting this system in operation and adapting it to new internal and external conditions regularly will definitely prepare the enterprise for the future rather than saving the day.

I would like to add a few words at this point. The operation of an internal control system does not depend on some ERP programs or external consultancy; what needs to be changed first is the enterprise's approach to institutionalization. Unless that approach is changed funds to be allocated to consultants and software will never give the desired results.

I would like to recommend the following websites for those who are interested in the matter: Institute of Internal Auditing www.tide.org.tr and The Institute of Internal Auditors www.theiia.org.


1. OECD Principles of Corporate Governance http://www.oecd.org/dataoecd/32/18/31557724.pdf

2. COSO, definition of Internal Control, http://www4.coso.org/resources.htm

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Some comments from our readers…
“The articles are extremely timely and highly applicable”
“I often find critical information not available elsewhere”
“As in-house counsel, Mondaq’s service is of great value”

Up-coming Events Search
Font Size:
Mondaq on Twitter
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
Email Address
Company Name
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:
  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.
  • Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.
    If you do not want us to provide your name and email address you may opt out by clicking here
    If you do not wish to receive any future announcements of products and services offered by Mondaq you may opt out by clicking here

    Terms & Conditions and Privacy Statement

    Mondaq.com (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

    Use of www.mondaq.com

    You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about Mondaq.com’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.


    Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

    The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.


    Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

    • To allow you to personalize the Mondaq websites you are visiting.
    • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
    • To produce demographic feedback for our information providers who provide information free for your use.

    Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

    Information Collection and Use

    We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

    We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to unsubscribe@mondaq.com with “no disclosure” in the subject heading

    Mondaq News Alerts

    In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.


    A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

    Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

    Log Files

    We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.


    This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

    Surveys & Contests

    From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.


    If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.


    From time to time Mondaq may send you emails promoting Mondaq services including new services. You may opt out of receiving such emails by clicking below.

    *** If you do not wish to receive any future announcements of services offered by Mondaq you may opt out by clicking here .


    This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to webmaster@mondaq.com.

    Correcting/Updating Personal Information

    If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to EditorialAdvisor@mondaq.com.

    Notification of Changes

    If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

    How to contact Mondaq

    You can contact us with comments or queries at enquiries@mondaq.com.

    If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at problems@mondaq.com and we will use commercially reasonable efforts to determine and correct the problem promptly.

    By clicking Register you state you have read and agree to our Terms and Conditions