• Why Strong Internal Controls Are Necessary for a Healthy Business
• Conducting an Internal Control Check-Up
• Prescribing the Right Internal Controls for Your Business
• Our Services to Strengthen Your Internal Controls

Internal controls are the mechanisms, rules, and procedures implemented by a company to ensure the integrity of financial and accounting information, promote accountability and prevent fraud. Besides complying with laws and regulations, and preventing employees from stealing assets or committing fraud, internal controls can help improve operational efficiency by improving the accuracy and timeliness of financial reporting.

Why Strong Internal Controls Are Necessary for a Healthy Business

Strong internal controls can keep a company healthy by helping to achieve four key business objectives:

1. Safeguarding assets. The right controls protect a business’ physical and financial assets from fraud, theft, and errors. Likewise, proper controls quickly identify errors and fraud if they occur. One of the most essential concepts related to internal controls (and specifically to safeguarding assets) is the segregation of duties (i.e., separating incompatible functions) because it prevents a single individual from requesting, authorizing, verifying, and/or recording business expenditures.
2. Ensuring reliable financial reporting. Owners and managers require accurate financial information to make informed decisions. Because solid internal controls help to maintain the validity of financial data, they also equip management to make more educated judgment calls.
3. Maintaining compliance. Credible financial data enables organizations to fulfill their duties to file complete and accurate tax returns, as well as meet any financial reporting obligations (e.g., to fulfill loan covenants). Appropriate processes and procedures also allow organizations to meet other regulatory and statutory filing or reporting requirements.
4. Accomplishing operational efficiency. Organizations typically operate more effectively with processes and procedures in place. A strong internal control environment can foster efficiency through automation of manual controls, removing unnecessary or duplicative steps in a process, or combining certain functions in a cost-effective manner. Finally, when financial data is consistent and easily accessible, management receives timely and relevant information to verify that activities are in-line with business objectives.

Prescribing the Right Internal Controls for Your Business

Solid internal controls are essential for a healthy business. Before a company can select any controls, management should know which ones best address its challenges. There are three primary types of internal control “medicine” that business owners and managers can use to increase their operational efficiencies.

1. Preventive and Detective Controls

Solid internal controls are essential for a healthy business. Before a company can select any controls, management should know which ones best address its challenges. There are three primary types of internal control “medicine” that business owners and managers can use to increase their operational efficiencies.

A preventive control mitigates the occurrence of errors or irregularities (picture an apple a day keeping the doctor away). For example, if the objective is to ensure accurate time, attendance, and payroll records, then a good preventive control might be required supervisor approval of all employee attendance entries before their processing in the system.

On the other end, a detective control identifies existing errors and irregularities to prompt corrective action (imagine an X-ray identifying an already broken bone). Processes such as internal audits, physical inventory counts, and monthly bank account reconciliations are all examples of detective controls.

In the best cases, preventive and detective controls work hand in hand. For example, acceptable-use policies and access controls protect access to valuable customer data and accounting information. Simultaneously, the creation of computer usage logs and monitoring through regular audits might detect any unusual activity that has previously occurred.

2. Mitigating Controls

Another type of internal control is a mitigating control, which includes procedures that can help reduce risk. For example, if an organization is too small to properly segregate duties, then it can establish mitigating controls such as detailed transaction reviews, after-the-fact approvals, and surprise checks to reduce the risk in the affected area.

3. Manual, Automated, and IT-Dependent Controls

Each of the above controls can be manual, automated, or IT-dependent. Manual controls require human action, such as two signatures on a check. Automated controls monitor routine processes without human action. For example, accounting software may be programmed to deny an accounts payable invoice if the original vendor invoice, purchase order, and record of receipt are not all provided. IT-dependent controls require a combination of automated processing and human interactions. For instance, the automated denial of an accounts payable invoice may be captured in an exception report that allows a human to correct data entry or other issues so that the erred invoice can be re-processed through the system.

The Right Types of Internal Controls Could Lead to a Bright Prognosis

Implementing the right types of internal controls increases the likelihood of a positive prognosis for your company’s health. Assess your organization’s current needs and goals to determine which controls will work best for you. Nugent & Associates if you would like us to assist you in diagnosing your business’ operational condition.

Conducting an Internal Control Check-Up

Prescribing the right internal controls is not necessarily complex, but it does require careful examination of the business’ organizational structure. Business owners and executives should identify not only what checks and balances they need to implement, but also who is responsible for ensuring that they work.

Controls over financial processes generally fulfill at least one of these criteria:

1. Completeness. All records and transactions are included.
2. Accuracy. The correct amounts and other relevant data are recorded.
3. Validity. The transactions captured or recorded were real and appropriate.
4. Authorization. The proper authorization levels are in place to cover such things as approvals, payments, data entry, and computer access.
5. Timeliness. Financial reports are available in a timely manner for decision usefulness.

Take Control of Your Business’ Health

In the end, strong internal controls increase the likelihood of achieving and maintaining business health. Take charge of your organization’s health by implementing the appropriate internal controls. Does your organization need help establishing — or refining — effective internal controls? If so, then Nugent & Associates . Our experienced professionals have the insights to help you improve the health of your company.

Our Services to Strengthen Your Internal Controls

At times you may need a trained outside professional to evaluate your company's operations to determine if the appropriate controls are in place to ensure proper handling of resources and to protect yourself from employee theft.

We assess your internal control systems to determine the efficiency and effectiveness of your operating procedures. Then we make recommendations that help your company become stronger and more profitable by correcting any inefficient or ineffective operating procedures we find.

What we do for you...

• Implement segregation of duties so that duties are divided, or segregated, among different people to reduce risk of error or inappropriate actions. No one person has control over all aspects of any financial transaction.
• Make sure transactions are authorized by a person delegated approval authority when the transactions are consistent with policy and funds are available.
• Ensure records are routinely reviewed and reconciled, by someone other than the preparer or transactor, to determine that transactions have been properly processed.
• Make certain that equipment, inventories, cash and other property are secured physically, counted periodically, and compared with item descriptions shown on control records.
• Provide employees with appropriate training and guidance to ensure they have the knowledge necessary to carry out their job duties, are provided with an appropriate level of direction and supervision, and are aware of the proper channels for reporting suspected improprieties.
• Document policies and procedures and making them accessible to employees. The documented policies and procedures provide day-to-day guidance to your staff and continuation of duties in the event of prolonged employee absences or turnover.
• Review operations to ascertain whether results are consistent with established objectives and goals and whether the operations are being carried out as planned.