Final answer:
The CEO's non-compliance with the company's internal controls and corporate policies impacts the control environment aspect of internal control. This behavior can undermine the effectiveness of the entire internal control system by setting a negative tone at the top, which can influence how all employees view compliance with procedures. The correct option is b. Control environment
Step-by-step explanation:
The CEO's disregard for corporate policies and internal controls, particularly the non-adherence to the corporate code of conduct and the override of controls related to the separation of duties affects the control environment component of internal control.
The control environment is the foundation of the five internal control components, which include the integrity, ethical values, and competence of the entity's people. It sets the tone for the organization, influencing the control consciousness of its people.
When senior management, like a CEO, dismisses the importance of corporate policies, it sends a message that can have a pervasive impact on the staff's attitude towards compliance and control procedures.
This erodes the effectiveness of internal controls because employees may take cues from management's behavior, potentially leading to widespread non-compliance and increased risk.
Effective corporate governance relies on several key institutions including the board of directors, auditing firms, and outside investors. Inadequate governance can result in a failure to provide accurate financial information to investors, as seen in the case of Lehman Brothers.
Internal whistle-blowers are also critical, as they are positioned to report misconduct, but they face significant personal risks like termination or retaliation when attempting to act against malpractices within an organization.The correct option is b. Control environment