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Internal Controls: Why They're Important In Your Business

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Internal controls play an essential role in every company’s success, yet many business owners don’t have a clear understanding of what they are or why they are important. We at MGA are committed to our clients’ success, and because of that, we are also committed to providing clarity and understanding in the gray area of internal controls. Let’s break it down.

A company’s internal control structure is unique to it just like your fingerprints are unique to you — one size does not fit all. Internal controls should be both effective and efficient for your particular organization. For example, the internal control structure for a Fortune 500 company will not necessarily be appropriate for a small owner-operated business. It is essential for a company’s management team to carefully design an internal control structure that addresses the risks to the organization without burdening it with unnecessary costs and effort.

What are internal controls?

Internal controls provide reasonable assurance about achieving objectives regarding:

  • Effectiveness and efficiency of operations
  • Reliability of financial reporting
  • Safeguarding of assets
  • Compliance with applicable laws and regulations

The internal control framework consists of five key components:

  1. Control environment — the processes in place to carry out internal controls
  2. Risk assessment — the process for identifying risks
  3. Control activities — activities that mitigate risks
  4. Information and communication — the process of sharing internal and external information
  5. Monitoring — evaluating the effectiveness of internal controls

The parts are interrelated and integrated with the managing process.

What are the benefits of strong internal controls?

Establishing Processes

Business owners develop standardized processes and procedures for their staff to understand and follow. They inform their employees of the desired operations, and they expect that their employees will support them as they perform their daily tasks. Documented established procedures bring cohesiveness and order to a company because everyone knows exactly what is expected of them.

Segregation of Duties

Properly designed internal controls can ensure that an organization has adequate segregation of duties, providing a system of checks and balances. For example, the employee who deposits checks should not be the same employee who reconciles bank statements. Proper segregation of duties can also play a role in reducing fraud or theft.

Reducing Fraud and Theft

Effective internal controls can reduce and likely prevent fraud and theft. Internal controls may include approving new vendors and employees as well as keeping valuable inventory and check stock in secured locations.

Producing Timely and Accurate Financial Statements

Internal controls can help employees capture and record transactions within the accounting records and ultimately produce timely and accurate financial statements. Accurate and timely financial statements are critical to both internal and external stakeholders and will aid management in making decisions and effectively planning for the future.

Reducing Errors

Errors in a company’s accounting records can damage relationships with customers, vendors, and employees and ultimately result in a loss of income. Properly designed internal controls should help your company prevent or identify errors. Automation of processes and controls and proper levels of review can prevent errors from entering into the accounting system that could result in damage to a company’s reputation.

MGA is here to make your complex situations simple

At MGA, our team of trusted experts can help you design an effective and efficient internal control structure for your organization. We offer a wide variety of assurance services, and we are here to make the process more comfortable for you and your business.

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Need a trusted partner? Let’s talk.

August 8, 2018