What Does a Policy Do? The Primary Roles Explained

Policies are frameworks that guide behavior and decision-making in various environments, from businesses to government agencies and communities. They establish a structured approach to operations, ensuring actions align with established principles and goals. Policies help organizations function effectively and consistently, fostering a predictable environment for all stakeholders.

Understanding What a Policy Is

A policy is a set of principles, rules, or guidelines adopted by an entity to govern its actions and achieve specific objectives. Policies are statements of intent, articulating an organization’s stance on particular matters. For instance, a financial policy might stipulate that transactions exceeding a certain threshold must receive dual authorization to prevent errors or unauthorized spending. This framework serves as the foundation for developing detailed operational procedures.

Policies provide a broad understanding of expected conduct without delving into minute specifics. They communicate an organization’s values and culture, helping ensure consistency in decision-making. For example, a company’s financial policy might articulate its commitment to ethical financial reporting, guiding all accounting practices.

Primary Roles of Policies

Policies fulfill several roles within any organized structure, guiding how entities operate and achieve their aims:
Clarify expectations and direct actions, ensuring members understand their responsibilities. An expense policy, for example, outlines reimbursable expenditures and required documentation.
Promote consistency in decision-making and operations. Applying generally accepted accounting principles (GAAP) in financial reporting, for instance, is guided by internal policies that standardize how revenues are recognized or expenses are recorded.
Establish standards, setting benchmarks for quality, safety, or conduct. Financial policies, for example, can mandate daily bank reconciliations or specific internal controls for cash handling.
Manage risk by outlining acceptable and unacceptable behaviors. A segregation of duties policy in accounting, for example, prevents a single individual from controlling all aspects of a financial transaction, reducing the risk of fraud or error.
Promote accountability by defining responsibilities and providing a basis for evaluating performance. This means clear assignment of authority for financial approvals or budget adherence, holding individuals responsible for their financial decisions.
Facilitate compliance, helping entities adhere to laws, regulations, or ethical standards. For public companies, policies are instrumental in meeting requirements of laws like the Sarbanes-Oxley Act (SOX), which mandates strong internal controls over financial reporting. Policies on record retention ensure adherence to IRS guidelines.

Components of a Policy

Policies are structured documents that include several distinct elements to ensure clarity:
A policy statement is a core declaration of intent or rule, articulating the principle being established. This statement highlights the organization’s commitment, such as adherence to financial regulations.
The purpose section explains why the policy exists, outlining its objectives.
The scope defines who or what the policy applies to. A procurement policy, for instance, might specify it applies to all employees involved in purchasing goods or services.
A definitions section clarifies key terms used within the document.
Roles and responsibilities are detailed, outlining who is accountable for what actions under the policy. This could specify a department manager is responsible for approving expenses up to a certain limit, while a higher authority is required for larger amounts.
High-level procedures or guidelines provide general steps for implementation. For example, a policy might state all expense reports must be submitted through a specific electronic system.
Review and revision dates indicate when the policy will be assessed and updated to reflect changes in regulations or business practices.

Applying Policies in Practice

Once established, policies must be communicated to all affected individuals to ensure understanding and adherence. This involves disseminating the policy through internal communication channels, employee training sessions, or accessible online platforms. Communication helps integrate the policy into daily operations and decision-making processes.

Implementation involves putting policies into action by aligning daily activities with guidelines. A new revenue recognition policy, for instance, might require updates to accounting software and training for the finance team. Monitoring and enforcement are continuous processes, checking compliance and addressing instances where policies are not followed. This can include regular internal audits to verify adherence to internal controls, such as proper segregation of duties in financial transactions.

Corrective actions or disciplinary measures may be applied when non-compliance is identified. Policies require regular review and updates. Changes in laws, such as new tax regulations from the IRS, or shifts in organizational objectives necessitate revisiting and revising policies to ensure they serve their purpose.