Why Are Internal Controls Critical for Your Organization?
Growth is something that organizations have their eyes fixed on. They are cautious of wasting precious time and money in costly lawsuits, compliance risks resulting in penalties, or reputational damage. Internal controls help establish procedures and policies to keep the organization compliant, prevent employees from committing fraud, and improve the organization's operational and financial efficiency.
What is Internal Control?
COSO defines internal control framework as the following:
A process, effected by an entity's board of directors, management and other personnel, designed to provide reasonable assurance regarding the achievement of objectives in the following categories:
- Effectiveness and efficiency of operations;
- Reliability of financial reporting;
- Compliance with applicable laws and regulations.
Internal Controls are made up of steps, procedures, policies, and rules designed to ensure that an organization meets its objectives in the most efficient manner and prevent, detect, and mitigate risks facing organizations. Internal Controls aim at operational efficiency and effectiveness through the control of risks. Many experts even comment that internal controls are part of day-to-day operations.
The following are the basic features required for a robust internal control system:
The most important principle of internal control is establishing and entrusting the responsibility to specific individuals. Many times, teams fail because of the lack of clarity on one's responsibilities. Controls work the best when individuals are made responsible for executing tasks. Establishing responsibility includes authorizing the power to execute certain actions to these individuals.
Segregation of Duties
Separating duties involve bifurcating a task into a series of small tasks and sharing them among various employees. Separation of tasks (SOD) is the basic building block of internal controls and risk management and helps prevent fraud and errors. When parts of a task are divided and distributed to two or more employees, it reduces wrong doings, errors, and swindling. The SOD promotes shared responsibilities and prevents just one person from accessing company's critical assets. The concept of SOD is derived from the notion that giving complete control of critical systems and vulnerable processes to one single individual can increase risks.
Documentation is a critical component of any internal control. Maintaining appropriate records enables storing and safeguarding of documentation, and includes destroying any tangible obsolete records. A GRC platform like VComply helps organizations maintain a central repository of records, and associate proofs or evidence for a control. It also facilitates role based access to records and restricts unauthorized access. A backup of the data ensures that there is no data loss.
Independent Reviews and Audits
Independent internal verification or audits ensure that that controls are working as intended. They also assure the organization that it complies with rules and regulations, performance of operations are effective, and financial reporting is accurate.
Safeguarding and Insuring of Assets
Physical as well as digital safeguards help protect company's assets. They can be physical e.g. locks or intangible e.g. – passwords and pins . Irrespective of the methods, they are an important feature of the company's internal control plan. Documents such as blank checks, company letterhead and signature stamps are items that require safeguarding. One may commonly overlook this.
Thus, to ensure good governance and compliance, a company should have effective internal controls in place.
VComply is a leading GRC platform that helps meet the demands of compliance professionals by helping them perform risk assessment and implement controls. It comes with built-in compliance frameworks that helps you automate the implementation of compliance controls.
About the author
Devi drives growth through content at VComply. When she isn't writing, she's either reading, or traveling.