Whether you have your own business or you're planning to start one, it’s crucial to perform internal controls. These processes are a fundamental part of good corporate governance, as their objective is to help identify and manage the risks that keep your business from growing as well as keep them in compliance with governmental rules and regulations. An internal control audit is typically conducted by a company's management team, the board of directors and other industry experts. It consists of accounting and administrative controls with the objective to prevent and detect fraud, theft, misuse and human error.
The primary objective of internal control is to ensure the integrity of the company's financial information.
There are different types of internal controls, and each has a specific purpose. They all aim to improve a company's efficiency and performance while mitigating risks. These include:
- Preventive controls: The objective of preventive controls is to keep errors from occurring in the first place and ensure that all the departments are meeting their goals. For example, your management team can check the organization’s inventory, security systems, equipment and other assets, authorize employees to perform specific tasks and approve various procedures.
* Detective controls: The objective of detective controls is to identify the cause of problems and irregularities within your organization. This includes comparing information about current performance to forecasts, budgets and previous results in order to determine company performance.
- Corrective controls: The objective of corrective controls is to correct errors. For example, your company's management team may recommend backing up data in order to recover essential information in the event of a crash or security breach. This type of audit usually includes detective and preventive controls.
Accounting also makes use of controls in order to ensure the accuracy and integrity of financial records. These controls are related to but different from overall internal controls, though they are just as vital. The objective of accounting controls is to help keep management and others with a vested interest in the company from inflating numbers in order to make a company appear to be more profitable than it actually is.
Accounting controls include things like keeping certain financial documents out of the hands of management and keeping records in a locked location or away from where day-to-day business operations are performed. Accounting teams often make use of preventive, detective and corrective controls in their methods for accounting control, and accounting control makes accurate internal audits more possible for the organization.
The objective of every type of internal control within an organization is to ensure ethical and efficient functioning in the following three areas:
- Operations: Internal controls help an organization operate at peak efficiency when it comes to finances, personnel and business procedures. They also aid organizations in loss prevention and future projections.
- Reporting: Internal controls make all types of reporting more accurate, financial or otherwise. Their objective is to identify problems, solve them and then prevent them in the future, all while documenting things thoroughly and accurately.
- Compliance: Internal controls aim to ensure that a company is in compliance with all internal and external rules and regulations that pertain to its industry. This includes everything from manufacturing to labor laws, branding and even OSHA standards.
The objectives of internal controls go beyond preventing fraud and theft. When done correctly, they can help reduce risk, waste and abuse. These audits prove a company's compliance with applicable laws and regulations, protect its resources against loss due to mismanagement and maintain reliable financial data.
Any company big or small can benefit from internal controls. However, small businesses are more vulnerable to fraud and experience higher median loss compared to established companies. Corruption, employee theft and data omission from financial records are common. For this reason, small business owners need to be extra careful to perform internal controls on a regular basis.