Eugen Dehelean
Eugen Dehelean
Eugen Dehelean
,
Eugen Dehelean
Internal Controls:  Why They’re Important for Every Organization

Internal Controls: Why They’re Important for Every Organization

Last year, we told you how to combat fraudsters within your company. We feel strongly about how extremely vital internal controls are to the success of an organization and understand many in the business community lack the basic understanding of what these controls are and why they’re important. No worries. We at ADKF are here for you and we will break down the basics of internal controls to make it easier to understand. Let’s get started!

WHAT ARE INTERNAL CONTROLS?

Internal Controls, as defined by the Committee of Sponsoring Organizations (COSO), are a set of processes affected by an organization’s board of directors, management, and other personnel, designed to provide reasonable assurance regarding the achievement of the following objective categories:

  • Effectiveness and efficiency of operations
  • Reliability of financial reporting
  • Compliance with applicable laws and regulations
  • Safeguarding of assets

The internal control framework consists of five key components:

  1. Control environment – the processes in place to carry out internal control. This is the foundation on which internal controls are based including the Tone at the Top; the attitude of top management gets reflected at subsequent levels within an organization.
  2. Risk Assessment – the processes of identifying risks within the organization. Every area of an organization needs to have every potential risk and fraud risk identified and analyzed.
  3. Control activities – activities that mitigate risk. Standards of conducting business that are deployed through policies and procedures to help reduce the risks found in the previous step.
  4. Information and communication – the process of sharing internal and external information. Having effective internal control depends on high-quality information to communicate relevant information to both internal and external parties.
  5. Monitoring – the processes of evaluating the effectiveness of internal controls. These are ongoing evaluations of how good the internal controls are functioning and communicating back any deficiencies that are found.

EXAMPLES AND BENEFITS OF INTERNAL CONTROLS

Segregation of Duties

Segregation of duties is when work duties are divided or segregated among different people. This is done to reduce the risk of errors but also to reduce the risk of fraud or other inappropriate actions. An example of segregated duties is having one person request a purchase and another person approving that purchase.

Physical Controls

Physical controls are when cash, equipment, inventories, and other assets are actually secured physically. This can be done by using locks, safes, cameras, or other environmental controls. The primary underlying reason for having physical controls is to restrict the access to these assets to only those with authority to handle them. This helps in reducing the risk of theft and safeguard an organization’s assets.

Establishing Processes and Policies

It’s imperative for an organization to establish a set of standardized processes and procedures for the entire organization to understand and follow. These policies and procedures help guide and inform employees on how to complete their function within the organization. These documented policies and procedures should also be available for all levels of an organization. By having well-defined procedures and policies in place brings about a sense of community amongst the workforce because everyone knows what is expected of them.

Every organization is different so the setup of internal controls will be different for each. ADKF is here to help with any questions you might have in establishing or reviewing proper internal controls for your organization!


ADKF
is the largest, locally owned public accounting firm in San Antonio, Texas, with branch offices in Boerne and New Braunfels. We have been serving our community since 1991. We are a full-service CPA firm dedicated to providing a broad range of tax, audit, bookkeeping, tax controversy, and consulting services with superior customer service to help our clients meet their goals and objectives. Please click here to set an appointment with us.

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