5 Key Elements of Good Internal Controls

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Image of business team working in open office and reviewing business' internal controls

According to the Association of Certified Fraud Examiners, organizations lose approximately 5% of their annual revenues to occupational fraud, and of these, small businesses with fewer than 100 employees are the most vulnerable.

Why? They’re least likely to have internal controls in place to detect and prevent fraudulent events.

Internal controls are systems and processes designed to safeguard an organization’s assets. In addition, controls create a foundation for accurate financial reporting, effective operations, and compliance with laws and regulations.

 

Five elements of internal controls

 

1. Control environment

The foundation of internal controls is the tone of your business at management level. Integrity and ethical values, management philosophy and operating style, and assignment of authority and responsibility fall under the control environment umbrella.

 

2. Risk assessment

Risk assessment is the evaluation of your business flow and exposure to risk. A number of risks are present for all organizations on a daily basis.

It’s essential to identify and analyze these risks in order to prevent an adverse event from occurring. You should perform risk assessments continuously.

3. Control activities

Control activities are the policies and procedures of your business. Activities include top-level reviews, and segregation of duties.

Establish new procedures and set up a perception of control so that the flow of responsibilities and transactions is diversified among staff – as much as possible.

 

4. Information and communication

This is the exchange of information within your business.

Clear lines of communication shouldn’t just flow from management to employees, but from employees to management so that each member of the team can successfully carry out their responsibilities.

 

5. Monitoring

Monitoring is the process of assessing your internal control performance. The board should evaluate management and supervisory activities, the budget and all other financial documents.

Recruit board members who are independent from the organization and have the financial expertise to do so.

 

Have questions about internal controls? Lets talk!