Internal controls are the policies and procedures implemented by businesses and organizations to assure that company actions take place with efficient and accurate operational, reporting, and compliance standards.
Internal controls are put in place to protect organizational assets and ensure all bookkeeping and accounting information is concise and accurate, for the overall health of the organization. A reliable internal control system is important for many important reasons:
1. Ensuring all assets are protected. Accuracy in bookkeeping helps ensure that company assets are being allocated toward the correct department and resources. Internal controls allow a “double-check” between what is occurring through transactions and what is being reported in the bookkeeping. By enabling a trail and verification system, the process helps to ensure that all assets are accounted for and safeguarded from potential misuse.
2. Ensuring accuracy in bookkeeping. Having accurate and reliable financial and non-financial reporting is imperative for the future and growth of an organization. Not only are accurate financial records needed for viewing by stakeholders and for tax information, they allow decisions to be made regarding the next steps for the business during the upcoming quarter or year.
3. Creating an efficient operating system. Internal and external audits are an important learning tool for every department in a business or organization. By conducting an audit, departments learn to become more efficient, using the least amount of resources available. An audit can lead to a measurement of internal controls that can be used on a daily, weekly, or monthly basis to continue operating at maximum efficiency.
4. Creating an understanding and atmosphere of compliance for employees. Unfortunately, those with the best understanding and access to a system are often the ones who choose to misuse the system. When employees understand what types of internal controls and safeguards are put in place, they understand the important of accuracy on their end and how easily misuse may be detected, leading to compliance and less cause for potential mismanagement.
Types of Internal Controls
1. Preventative: the most cost-effective type of internal controls because they help prevent the loss of assets in the first place. These are the most important to implement as a proactive measure rather than reactive. Examples include:
· Employee background checks
· Employee training and certification
· Password protected access and digital trail implementation
· Physical security systems
· Separation of duties
2. Detective: controls used to identify when preventative controls were not effective in safeguarding assets or controls used to prevent errors and irregularities from occurring. Examples include:
· Bank reconciliation
· Credit card reconciliation
· Inventory counts
· Cash counts
3. Corrective: controls used when detective controls find an error or irregularity. These can be expensive both in terms of implementation and time lost. Examples include:
· Data backups
· Insurance
· System management
· Tax audit
Why Use an Outside Person to Evaluate Internal Controls
It can oftentimes be difficult to separate your daily job responsibilities and conduct an audit of internal processes and systems. It may be appropriate to hire an outside professional to determine if the proper internal controls are in place for handling of resources and to help protect your business or nonprofit from theft or misuse.
Interested in an evaluation of your operating procedures and recommendations for implementing or increasing internal controls? Looking for an outsourced bookkeeper to accurately manage your bookkeeping records? Get in touch for a free consultation!