Have you ever wondered how companies run? What system keeps them organized and functional towards hitting the targets and achieving goals? We have a two-word answer for you: Internal Controls.
Every business in the world has to have established internal controls to continue in proper order. You can design them yourself or hire a professional to make them for you. Whether you are a small business or working in a large company’s top management, the right internal controls can make or break the company environment.
Today’s article is a complete guide for internal controls focused on the definition, types, and importance.
What Are Internal Controls?
Internal controls are procedures, mechanisms, and techniques established within an organizational structure to maintain workflow. Internal controls are mandatory regardless of the size of your company.
Different internal controls are introduced to manage various departments of the company. For instance, an internal auditor ensures that a company’s financial statements are accurate without material misstatements. This makes the annual external audit much more convenient.
Similarly, an IT control ensures that all the devices are running smoothly and there is an equal distribution across the board.
Importance of Establishing Internal Controls
Internal controls are a vital part of any company. But how? Let’s dive into the importance of establishing internal controls.
Fewer Risks in Company
Having no controls in a setup means everyone will do what they please. This increases the risks of failure and damage to the environment and encourages employees to do what they like rather than what the company needs.
From financial to tech-related and general admin risks, managing the company and keeping everything in place is a considerable challenge. Thankfully, with appropriate internal controls, there are more infrequent risks of fraud and failure.
Maintain Record Accuracy
When we say audit and internal controls are linked, it’s not a bluff. By placing the correct rules in place, you are maintaining the records accurately throughout the organization. This makes it easier for your external auditors to study the company and deliver their opinion much more quicker.
Increase System Efficiency
Internal controls are created according to the company’s needs. This means you can manage the system’s efficiency and deliver results more quickly and productively.
Types of Internal Control
To ensure that you apply them correctly, users need to understand the main types of internal controls.
As the name suggests, these controls establish preventative measures rather than action when the loss actually happens. They allow the management to detect mistakes before making any big decisions. Preventive controls are now streamlined with the latest technology, like computers, to avoid the risk of human error.
Some Examples of Preventative Controls
These are some ubiquitous examples of preventive internal controls in a company:
Determining who gets to do what is a great way to create a check on the overall performance of each employee. It gives hard workers an edge and separates the slackers. For example, you can segregate the roles of SEO and PPC in the marketing department. By the end, it will be easier to determine whose performance was good and who needs a talking to. Ensure that the roles you are handing over are worthy and experienced enough to work for you.
Another preventative control is to allow access to people who are a local part of your business. For instance, handing over the cash vault keys to someone without proven experience might be harmful. Look for someone who has proven his loyalty to you. Controls can be put on anything from your computer-based data to physical files and even employee roles.
Finding the Right Employees
Hire people through a detailed screening process. List the things that you would like to see in potential employees. Interview them accordingly and pick someone who would be an asset.
Detective Internals Controls
Let’s get real. Being humans, it is only natural to make mistakes unintentionally. Detective internal controls figure out the problems occurring in your system. They are designed to find errors and present them to relevant people before it becomes a significant issue for the company.
You can create a set of analyzing and assessment controls to detect errors before reports are presented to the stakeholders.
Some Examples of Detective Controls
Here are the most essential detective internal controls that every company should consider.
One of the most important and valuable parts of any organization is its internal audit. A team of internal auditors assesses your financial statements and confirms whether respective departments are following the laws (set by you) and the international ones. This control prepares you for the final audit.
With so many transactions, it can become difficult for the finance department to keep track of all the organizations. Having someone to reconcile and report the day-to-day finances makes it easier to detect errors early. It also reduces the risk of any money-related fraud in the company.
Corrective Internal Controls
After detecting an error, it is mandatory to correct it. This is why we recommend having appropriate internal controls in place. From taking action against discipline problems to implying fines and legal cases in case of a scam, employers take corrective measures.
Some Examples of Corrective Internal Controls
Following are examples of corrective internal controls:
Patch management means you should regularly check for bugs and flaws in your system. Solve the problems and make sure that everything is working smoothly. You should timely pay for all the subscriptions and keep checks with the customer care team.
Constantly update policies when a system gap is identified. Make sure that you test everything beforehand before making an investment. New policies also help you stay in touch with organizational trends.
Remember that employees might react or breach protocols every now and then. From personal funds to fraud, you must maintain corrective measures on how to treat them.
Internal controls are an influential part of any organization.
There are three main types of internal controls. By implementing them properly, you can reduce the risk of fraud and errors and maintain a high-quality working environment and accuracy in your records.