For privately held companies, it\u2019s critical to take steps to safeguard your organization from fraud and other risks that may negatively impact your operations. An effective way to help your organization mitigate risks and achieve its objectives is through internal controls. Internal controls address risks, encourage compliance with policies, regulations and laws, ensure accurate financial record-keeping and reporting, and support efficient, streamlined operations.<\/p>\n\n\n\n
What exactly are internal controls? According to the Committee of Sponsoring Organizations\u2019 (COSO), an internal control is defined as \u201ca process, effected by an entity\u2019s board of directors, management, or other personnel, designed to provide reasonable assurance regarding the achievement of objectives relating to operations, reporting, and compliance.\u201d<\/em><\/p>\n\n\n\n In the remainder of this blog, we will explore how internal controls help you address risks, stay organized, operate more efficiently and achieve financial goals.<\/p>\n\n\n\n It may seem daunting to start from square one when implementing internal controls, but not to fear \u2013 there are effective procedures you can utilize to integrate them from the ground up. The first step is to conduct a risk assessment of your organization to identify operational areas that are most prone to errors or issues.<\/p>\n\n\n\n Once you\u2019ve determined key risk areas of your company, it\u2019s time to decide which type of internal controls will be most effective for your organization. Just as your company is unique in its business model, size, revenue, structure and other features, internal controls also come in a variety of forms: automated or manual, preventative or detective.<\/p>\n\n\n\n Manual controls<\/strong> are procedures performed by individuals without full reliance on an IT system for execution of the control. Manual controls may include requiring signatures on documents or other tasks that are performed by individuals and not technology. Automated controls <\/strong>can be more reliable than manual controls because they are programmed in an IT system and are not prone to human error. Automated controls are implemented when systems are configured to perform specific tasks, such as identifying fraudulent activity, forcing workflows or approvals and backing up critical data.<\/p>\n\n\n\n Internal controls should include a balanced mix of Preventative <\/strong>and Detective controls. Preventative controls<\/strong> put safeguards in place to prevent risks to objectives, such as authorization prior to paying invoices, approval of journal entries prior to posting, or passwords to ensure access to company data is protected. Detective controls<\/strong> involve review or validation of transactions or data after they have occurred or have been recorded to identify and correct risks to objectives, such as review of bank reconciliations or period over period variance review of financial statements.<\/p>\n\n\n\n Now that you understand the basics of internal controls, let\u2019s dive in to how they can help your organization.<\/p>\n\n\n\n Key business partners may require certain compliance-related tasks that private organizations need to comply with for the relationship to continue. For example, a financial institution may require audited financial statements and for the company to have an established board of directors or Sarbanes-Oxley (SOX) compliance before lending to that organization.<\/p>\n\n\n\n Internal controls also establish a clear segregation of duties, creating a system of checks and balances among employees and their responsibilities that is visible to executives and stakeholders. Clear designation of employees\u2019 responsibilities creates a culture of accountability and \u2013 especially when it involves company financial reporting \u2013 reduces opportunities for fraud.<\/p>\n\n\n\n Internal controls establish procedures that will be required when a company becomes public, so a company with internal controls will be that much more prepared if the possibility of a transaction becomes a reality. A strong implementation of controls increases company value for any future transactions such as private equity, merger or an acquisition.<\/p>\n\n\n\n State or federal governments may require a company to certify that they are in compliance with certain laws and regulations prior to approving government contracts. If this applies to your business, internal controls are a surefire way to lessen the likelihood of experiencing issues when forming government contracts.<\/p>\n\n\n\n In addition to complying with laws and regulations, internal controls can improve operational efficiency by improving the accuracy and timeliness of financial reporting.<\/p>\n\n\n\n Financially, internal controls are a major benefit because they can be automated to streamline a company\u2019s financial operations such as reports, audits, transactions, billing and invoicing.<\/p>\n\n\n\n Internal controls serve as a blueprint of an organization\u2019s inner operations, which helps pinpoint exactly where and how risks, such as fraud or breach, may occur \u2014 and also map out exactly what is being done to address those risks. As a result, employees will have more clearly designated responsibilities, so it\u2019s easier to spot when a breach occurs or a company resource is misused.<\/p>\n\n\n\n Failing to integrate internal controls can lead to any number of challenges: negatively impacted audit results, data breaches, disruptions to business operations, damage to organization\u2019s reputation, and loss of revenue, to name but a few. It can be difficult to figure out exactly how and where you need to use them \u2013 but one of Addison Group’s consulting brands, Bridgepoint Consulting, has extensive experience in implementing internal controls that match an organization\u2019s specific needs.<\/p>\n\n\n\nHOW TO USE INTERNAL CONTROLS:<\/h2>\n\n\n\n
FOUR WAYS INTERNAL CONTROLS HELP YOUR ORGANIZATION<\/h2>\n\n\n\n
Improve Reliability of Financial Reporting for Private Investors and Financial Institutions<\/strong><\/h3>\n\n\n\n
Prepare Company for Initial Public Offering (IPO) or Acquisition by a Special-Purpose Acquisition Company (SPAC)<\/strong><\/h3>\n\n\n\n
Improve Compliance with Laws and Regulations<\/strong><\/h3>\n\n\n\n
Reduce Fraud Risk<\/strong><\/h3>\n\n\n\n
MOVING FORWARD<\/h2>\n\n\n\n