We know that good governance is the culmination of robust internal controls. Risk management specialists and compliance officers always speak about implementing internal controls. What exactly is the definition of internal controls? The federal security law, Section 13(b) of the Securities Exchange Act of 1934 provides a clear definition of internal controls interns of accounting and bookkeeping:
The act states that:
(1) All transactions should be conducted only in accordance with management’s general or specific authorization.
(2) Transactions are recorded as necessary (I) for the preparation of financial statements in conformity with generally accepted accounting principles or any other criteria applicable to such statements (II) and for keeping the accountability of assets.
(3) Access to assets should be done only by management’s authorization.
(4) Perform recorded accountability of assets with existing assets at reasonable intervals.
This definition provides only a partial view of the scope for internal controls, which is also only accounting and bookkeeping perspective. Actually, in business, the scope of the term internal control is much more wide. Any measure or process you adopt to achieve the organization’s operational, financial, and compliance objectives can be referred as controls. These could include policies or procedures that are preventive, detective, corrective, directive, or corroborative in nature. There would be no way to track the performance of compliance obligations or financial reporting in the absence of controls. It makes it difficult for the management to make fully informed financial decisions.
An entire internal control system helps the organizations establish an environment that ensures that the company is doing its business according to the rules and regulations. Regular audits are conducted to calculate the risks arising out of lack of internal controls or to test the effectiveness of controls.
The following are the basic features required for a robust internal control system:
The overall attitude, awareness, and actions of an organization’s leadership and employees towards internal control. It sets the tone for the control system’s effectiveness.
The process of identifying, analyzing, and managing risks that could affect the achievement of objectives. It involves evaluating the likelihood and potential impact of risks.
Specific policies, procedures, and practices that are implemented to mitigate identified risks. These can include authorization processes, segregation of duties, access controls, and reconciliation procedures.
The flow of relevant information within the organization to support the functioning of internal controls. Effective communication ensures that relevant information is shared with those who need it.
Continuous monitoring and periodic reviews of internal control activities to ensure they are functioning as intended. This also includes assessments of the overall effectiveness of the control system.
These features work together to create a robust internal control framework that helps organizations achieve their objectives, safeguard assets, maintain compliance, and enhance operational efficiency.
Leadership integrity, segregation of responsibilities and competent employees are essential components of the control environment within the framework of internal controls. They play a crucial role in shaping the organization’s ethical culture, fostering responsible behavior, and promoting the effectiveness of internal controls.
Once the leaders encourage integrity through their actions, employees automatically follow them. It sets the overall value system of the organization. It can be continuously imbibed in the minds of the employee through written materials like handbooks and manuals. However, management should also follow the policies to ensure successful implementation of the policies and procedures.
An organization’s ability to recruit and retain competent personnel indicates management’s intent to properly record accounting transactions and compliance obligations. In addition, the retention of employees increases the comparability of financial records from year to year. Furthermore, an auditor’s confidence in the underlying accounting records increases as he observes the reliability of the organization’s personnel. This in turn reduces an auditor’s assessment of the risk of a material misstatement in the entity’s financial statements.
One can bifurcate a task into a series of small tasks by segregating it between various individuals. Segregation of responsibilities is intended to prevent unwarranted fraud and error. It is important to have an effective SOD policy to ensure the efficiency of the relevant internal control. This reduces the risk of errors, mistakes and misappropriations. It helps the company separate various related functions to ensure that a single individual is not in charge of an important task.
Documentation is an important component of any internal control. Maintaining appropriate records enables management of records like storing, safeguarding, and destroying tangible or electronic records. Using a GRC solution that seamlessly integrate various applications like Google Drive with the platform helps maintaining and managing . A backup of all the data ensures there is no data loss in case of power failure or there are no employee creates fake transactions. It also acts a legal proof during litigation.
Many safeguards prevent unauthorized access of company 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.
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