Overview of Internal Controls and Their Importance
We live in a fast-paced and rapidly-changing business environment focused on innovation and efficiency. With new systems, means of access, and growth, it is critical that your organization consistently reviews and updates its internal controls, policies and procedures. This needs to be done to stay ahead of the curve and mitigate new risks that may arise.
Internal controls are processes for achievement of objectives in operational effectiveness and efficiency, reliable financial reporting, and compliance with laws, regulations and policies. Having effective controls in place and monitoring those controls to ensure they are operating as intended will reduce the risk of asset loss. It also will help ensure that information is complete and accurate, financial statements are reliable, and that your organization complies with any applicable laws and regulations. Management is responsible for establishing and maintaining the internal control environment. Having strong internal controls will help reduce risk and loss, however, there is no assurance that all risk is eliminated due to inherent limitations of any system of controls.
In designing a system of internal controls, organizations should strive to develop internal controls where benefits outweigh the costs. The motivation to assess and enhance an organization’s internal controls may begin with external pressure, such as new emerging legislation or a regulatory audit, however, assessing and enhancing controls can be a significant value-adding activity to your company. Effective internal controls can help any organization meet their operational objectives while reducing the risk of doing business. This will make your company more profitable and able to meet its business objectives.
Consequences of a Weak Internal Control System
The importance of developing strong controls to support your management functions cannot be understated. If an organization has a weak internal control system, the consequences can include:
- Loss of assets or resources
- Penalties and fines
- Poor management decisions
- Occurrence of fraud
- Unfavorable publicity
- Damage to reputation
- Failure of external audits or reviews
The organization’s environment and how management and peers interact with each other can have an impact on the effectiveness of the control environment. Employees look to management for guidance. Establishing a robust tone at the top is the most important step to supporting your control environment. This can happen by showing a serious commitment to implementing controls at all levels of your organization.
The Auditor or CPA’s Role
Auditors can play a vital role in a system of internal controls by performing evaluations or audits and making recommendations for improved controls. As an independent third party, a suitable Certified Public Accountant (CPA) can provide a valuable and efficient internal control evaluation. CPAs who perform these services can utilize their knowledge of internal controls, systems of reporting, and applicable laws and regulations to help ensure the internal controls are operating as intended. If there is a significant amount of documentation missing or if internal controls are not operating as intended, a CPA can help get your organization back on track. Some of the common deficiencies or findings that may result from an internal control evaluation or audit include human errors, such as mathematical, input errors or formula discrepancies. Others include noncompliance with contract rules and regulations, inadequate segregation of duties, incompatible accounting systems, missing approvals, management override, and not having or not adhering to written policies and procedures.
If you or your organization would like assistance with monitoring your internal controls or evaluating specific compliance-related issues, you can reach me at email@example.com or 609-689-2333.