The Importance of Internal Control
Are your sales generating the profits you’ve been expecting? Are you wondering where your financial leaks are located? Sometimes, these are obvious (stolen merchandise) and other times, not so much (revenue losses due to rates that are too low). This is where the importance of implementing solid internal controls comes in.
Internal control is defined as a process that is implemented by a company’s board of directors, its management and business managers to provide reasonable assurance that operations will allow the organization to reach its objectives in terms of efficiency, the quality of financial information disclosed, and compliance with applicable laws and regulations.
It must be embedded in all activities without being perceived as an additional task.
One of the most widely used models of implementation is the COSO model:
This model displays the fundamentals of establishing good controls:
1- The internal environment:
- Do you have a code of ethics or code of conduct?
- What are your denunciation practices?
- What are your hiring policies? What about competency?
- Are you confident about the independence of external auditors and the audit committee?
2- It is crucial to establish the company’s objectives and communicate them to all employees.
- Your mission
- Your objectives in terms of sales, profitability, business, operations, and legal compliance
- Make sure your objectives are clear, easy to understand, and quantifiable—this is especially important
3- Based on these objectives, the risks must be identified. These risks can be either internal or external.
4- Evaluate the level of risk you are willing to take. This means that you’ll need to perform a cost-benefit assessment to compare the cost of implementing a control against your loss risk.
5- Establish the control measures you must implement, such as:
- Avoiding bad debts by submitting monthly account statements to your clients and following up on overdue accounts;
- Pre-approving employee overtime to avoid excessive costs;
- Establishing a monthly budget and analyzing any discrepancies. This will allow you to make adjustments as required. Capital Conseil can help you in this regard thanks to our new CFO service.
6- Document all of these controls and communicate them to your staff to make sure they understand your objectives and adhere to them.
Finally, all of this will need to be revised on a regular basis because as your company evolves, certain controls may become obsolete, while others will need to be added. As the image of the cube shows, all of these steps are performed at the level of strategy, operations, finances, and compliance.