Thought Leadership on Business Ideas for Growth Companies and Growth Consultants presented by Cerini and Associates LLP.
Internal controls are one of the most essential elements within any organization. Internal controls are put in place to enable organizations to achieve their goals. Management is responsible for the design, implementation and maintenance of all internal controls, with the board responsible for the overall oversight of the control environment. Strong internal controls allow for organizations to achieve three main objectives: accurate and reliable financial reporting, compliance with laws and regulations, and effectiveness and efficiency of the organizations operations. To achieve these objectives an internal control framework needs to be applied and followed throughout the organization. The five components of the internal control framework are: control environment, risk assessment, control activities, information and communication, and monitoring.
The first component, control environment, is crucial since it’s the foundation for the four other components of internal control. The control environment sets the tone at the top of an organization and provides discipline and structure. Within the control environment there are several important factors, including:
Ethical values and integrity: Management and employees must show integrity. If management displays issues with lack of integrity, it can trickle down to the employees causing internal control issues and opportunities for fraud.
Human resource policies and procedures: Control difficulties can be avoided by sound hiring procedures, training of new employees and appropriate discipline.
Organization structure: Organizations that have a clear understanding of who reports to whom within an organization will limit the chance for internal control issues.
Participation of those charged with governance: It is important for those charged with governance (audit committee, board of directors, etc.) to be involved with the organization and monitor internal control functions.
Philosophy of management and its operating style. If management incorporates the importance of internal control in its operating style, employees will know the seriousness of the matter.