Internal controls are significant to every single business. They play a vital role in ensuring that the businesses are running in their best state by ensuring they can attain the following goals:
- Assets have been properly safeguarded.
- Complied with Relevant laws and regulations.
- Financial reporting is reliable.
- Businesses are operating effectively and efficiently.
However, despite the advantages offered by internal controls, not all businesses apply them in their daily operations. Some ignored the importance of internal controls due to their costs, while some lack a proper understanding of how a good internal control system can benefit them.
Advantages of internal control and its impacts
Today we are going to discuss the advantages of internal control and how it will affect your organization.
Imposes segregation of duties
Every single internal control system will involve segregation of duties to operate effectively. This is where the company has different individuals to perform different parts of the controls. It can help prevent fraud and error, which we will discuss in the next few points.
An illustration of segregation of duties is having one employee prepare the purchase requisition and approve it.
Since the employees will only perform a part of the control and know that other employees will review their work, it will reduce the likelihood and opportunity for them to commit any fraud or error.
One of the most important features of internal control is that it can prevent fraud. Fraud can cause your business to lose money unnecessarily and even cause the business’s downfall if not handled properly.
So how can it prevent fraud? Here is an example:
Your business allows your employees to claim traveling expenses reimbursements. To prevent fraud, a good way is by setting a reasonable traveling fee per distance traveled for those who drive, for instance, $0.50 per kilometer, and requiring the employees to submit a screenshot from Google maps that shows the distance traveled. If the employees are taking public transports, they should then be required to show proofs of receipts.
By having the right controls in place, the business can prevent fraud from happening and prevent itself from suffering losses unnecessarily.
Internal controls can also prevent errors that might again cause the businesses to suffer a loss.
An example has internal controls to review the invoices raised to the customers. With proper reviews performed, every invoice raised will be checked before sending it out to the customers. Things to be checked include the customer’s name, the amount billed, and the date of billing.
This can prevent the business from invoicing the wrong amount to the wrong person. Undercharging the customers will cause the business to lose its income, while overcharging the customers can damage the business’s good relationship with the customers.
Identifies fraud and error
Other than preventing fraud and error, internal controls can also help detect them if they have already happened. This is important, too, as such incidents can affect your organization’s reputation and sabotage the business relationships with suppliers and customers.
With internal controls, all these can be identified in time to ensure their impact is minimized in time.
Ensures reliability of accounting information
With the internal control system in place to prevent and detect both fraud and errors, it will indirectly ensure that the accounting information generated is reliable. Such information will also be produced on a timely basis.
This information is important as it helps the business owners and other stakeholders make good business decisions at the right timing that will affect the growth and the direction of your organization.
When the accounting information is reliable, it will allow both your organization and the auditors to save time. There are fewer errors to detect and correct, and the auditors will likely not question as much when they perform the audit. It will likely also reduce the work required to be performed by the auditors.
Therefore, your employees will not have to spend as much time facing the auditors and focus on their work even during the audit period. The audit work can be completed within the agreed timeline and potentially incurring fewer hours than budgeted.
Ensures efficiency in operation
When every employee knows what they need to do and that all the work they performed will be checked by someone else, it reduces the chance of an error occurring and increases both the accuracy and the reliability of the work performed.
The internal controls also act as a benchmark for the management to review the performance of the employees, allowing the management to quickly find out which employees are or are not performing well.
Management will be able to identify underperformers and take appropriate actions in helping them to improve, thereby increasing the efficiency in the overall business operation and allowing the business to operate even more smoothly.
Ensures safety of employees
When everyone is following the company’s internal controls, it will help ensure everybody behaves in a certain way that reduces unwanted incidents.
For example, the internal controls prevent the employees from disregarding workplace safety when working at a construction site, thereby reducing the risk of getting injured due to work.
Helps to set expectations
Through internal controls, the business owners and the management can set their expectations by letting them know what the desired ways of working in the business are.
Internal control systems need to be adjusted to fit different companies’ business nature and organizational culture. They should be unique to the businesses and allow the business to operate efficiently and effectively.
Hence, the company’s management will need to have a good understanding of the business’s operations and culture before it can develop a suitable internal control system. This internal control system should help address the business’s risks and reduce the risks without breaking the bank.