What is internal control and why does it matter?

What is Internal Control and why does it matter?

We have heard and read about compliance many times during our professional life. Countless SOPs and e-learnings have been created to ensure we know about it. You may have come across the word “Internal Control” in this context. What is internal control and why does it matter?

Internal control is as broad as compliance. It is the process of providing a reasonable framework for an entity to achieve its objectives concerning the reliability of financial reporting, effectiveness and efficiency of operations. That includes as well the compliance with applicable laws and regulations.

Internal Control Frameworks

A robust internal control framework is designed to address business risks that threaten the achievement of those objectives. Internal control refers to the whole system of internal checks, internal audits, and other forms of control.

There are different types of internal controls. We have controls that are designed to detect, correct or prevent errors or irregularities. In a usual business setting all three types are needed to have an effective internal control system.

The benefits of an internal control system

Numerous advantages promote the implementation of an internal control system. It helps to mitigate risks and protect assets of a business from misuse, theft or accident. An adequate control framework supports the implementation of management policies in various areas of business operations. It also assists auditors to detect errors and improve processes. If a good internal control system exists in the accounting system, an auditor can put greater reliance on the financial data. It leads to financial statements being more sound and accurate.

«Countless SOPs and e-learnings have been created to ensure we know about compliance. Do you know how you can contribute to it?»

However, no matter how well internal controls are designed, they still have some limitations. In the end you cannot check every little detail of every transaction. Humans are bound to make judgment errors, especially when under pressure. Employees may misunderstand instructions or errors occur due to complexity of technology. Also, higher management might be able to override policies and procedures for personal advantage.

 

In the end it is all about humans

The human factor makes it complex. Do you know what your role is in the internal control framework? Do your employees know about it? A well designed onboarding process can have a tremendously positive impact on the awareness and consequently the compliance with internal guidelines and regulations.

Get in touch today

Do you need help with setting up or improving your internal control framework? Or have you just re-organized your entity, but the minimal controls are not in place yet? Ruby can give you a hand – reach out today!

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