The Importance of Internal Controls
What Are Internal Controls, And Why Are They Important?
Internal controls are the procedures, policies, and rules that a company puts in place to ensure their financial integrity and accounting accuracy. Internal controls are crucial to the success of any business, as they help prevent fraud, support compliance with laws and regulations, and enhance the accuracy and timeliness of a company’s financial reports. Additionally, internal controls help to facilitate both internal and external audits.
When your business has a robust, consistent internal control system, you benefit from increased operational efficiency. With the correct procedures in place to verify the accuracy of your company’s finances, you can have the visibility to make the best decisions for your business. Internal controls allow you to monitor your company’s performance in a systematic way and confirm that goals and objectives are being met. With an early warning system in place, businesses can rectify small problems before they become significant, and avoid regulatory fines from external audits.
Generally, internal accounting controls are grouped into three different categories: preventive, corrective, and detective.
Preventive controls help to avoid accounting errors and discrepancies from occurring in the first place. They aid in verifying accounting accuracy and eliminating the possibility of employee fraud. Some common preventive controls include:
- Separation of responsibilities, meaning no one person is in charge of a financial transaction from start to finish
- Controlled access to the accounting system
- Limited involvement from management in financial reporting
- Expense verification
- Limited access to assets, such as cash, equipment, or inventory
Preventive controls are generally integrated into a business’ accounting process so that they take effect on a continual basis.
Detective controls are used in conjunction with preventive controls to identify discrepancies or errors that have already occurred. Detective controls are often represented in quality control procedures. Some of these include:
- Reconciliation, which entails comparing two sets of financial records to verify accuracy and agreement.
- Inventory counts and checks
- Internal audits
- External audits
- Following up on unexpected or unusual transactions
Detective controls are particularly useful in identifying why company objectives and goals are not being met.
Corrective controls aid in taking rectifying steps if the business’ detective controls have flagged an issue with an accounting process, or if preventive controls have failed to avoid an error. Corrective controls help resolve discrepancies and prevent errors from causing additional problems. Some corrective controls include:
- Adjustments or rectifications in the accounting system
- Patch management through installing software updates to fix system vulnerabilities
- Disciplinary actions
- Updated accounting protocols, particularly if an internal control was not effective or not already in place
How Can Outsourcing Aid Internal Control Implementation?
Though public companies are already required to undergo external audits, privately held businesses can similarly benefit from bringing in an external team to implement internal controls. With outsourced accounting support, financial duties can more easily be segregated. Third-party outsourced support can more objectively review financial reporting and procedures. Having an extra set of eyes on your numbers can additionally help to improve internal controls and reduce risk. Plus, outsourced consultants that have experience with industry-specific controls and common practices can improve your business’ overall operational efficiency.
The bottom line? Outsourcing your accounting support to implement internal controls can enhance your business’ operational performance, and free up time for you to focus on your business.