Most companies have policies regarding internal controls reporting. This sort of reporting deals with compliance and quality assurance as well as the maintenance of a certain standard across all employees and departments. There are many types of internal controls reports, and some may be appropriate or ill-suited to your business depending on the sort of work you do. When writing an internal controls report, it’s essential to understand their purpose and identify all potential threats within your organization.
What Are Internal Controls Reports?
In general, internal controls are what companies use to maintain a level of service in one regard or another. Oftentimes, these are end-of-year procedural documents. For instance, in a plant, you would need to be sure the eyewash station fluid isn’t expired and that machine filters and parts are cleaned. While eyewash stations and machine filters are physical examples required to maintain safety, many other internal controls represent ways to keep your company safe from fraudulent transactions.
Physical safety measures are a bit less nebulous than accounting rules or financial laws, but both sorts of reporting are necessary. In either case, if proper monitoring does not occur, you could leave your business open to litigation. Internal controls reporting helps to prevent this sort of trouble by ensuring clear and well-reasoned expectations that everyone in your company can understand at a base level.
The Internal Controls Report
So, what exactly is an internal controls report? Essentially, these reports can be any rules, procedures, mechanisms and other policies that are implemented by a company to ensure accountability and prevent litigation. These procedures are different from basic rules and laws that cities, states or federal bodies issue to which all companies in a given industry must adhere.
When dealing with nonphysical assets, such as data or digital financial numbers, you also need to have methods in place for your company to protect both itself and its customers. By putting up roadblocks and checks and balances to prevent fraud and ensure accuracy, you maintain a level of perceived value to clients. You also make it more difficult for employees to defraud or be defrauded.
As defined by auditing and accounting, all internal controls are a process for ratifying your organization’s objectives, checking your operational effectiveness and keeping yourself safe from fraud and litigation. Internal controls, by definition, are everything that control the risks presented to your organization. They encompass both the physical and the digital.
Physical Internal Controls
Building codes, maximum occupancy limits, air handlers and plumbing are all things for which you need to account when you’re erecting any structure, no matter what sort of work will be done within.
What sort of funding do you want to direct to what areas of your properties? When was the last time that you had updates run for your facility? What annual checks and processes do you have your technicians check on a regular basis? Preventative maintenance is one of the most obvious examples of internal controls.
Digital Internal Controls
Your digital assets are typically private and visible just to staff and your customers. For example, any personal identifying information, such as a Social Security number, must be kept safe from hackers or other outside forces without legitimate access.
Most private customer data is regulated by the federal government. However, that doesn’t mean that most companies stop at those levels of regulations, nor should they. People choose to work with certain companies based on their security or their perceived security. For this reason, most companies try to go above and beyond when it comes to security, and they strive to prove that to their customers.
Setting Internal Controls Reports
Internal control objectives should be in place within your organization at all times. These will relate to the way you report finances, how those reports look and how milestones are marked. No one person should be in control of internal control reporting. In fact, large companies have entire departments devoted to handling compliance issues.
Data in Internal Controls
Data is an extremely broad topic that can be contorted to fit nearly every aspect of your business. In this sense, you will have specific data that needs to be safeguarded. Purchases, user data, expenses and client purchasing information are all examples of types of data. Some of your data may be classified, while other aspects of your data may not be private.
Data processes should include ownership as a concept. Who controls the data? Who says when it can be released or if it needs to be destroyed? How long are you going to keep data?
A good example of data protection can be seen in the medical field. There was a period of time in the 1990s and early 2000s when most hospitals were transitioning from hard copy files to digital. In a purge, some hospitals didn’t keep the correct documentation regarding a procedure and lost a lawsuit as a result.
Financial Internal Controls
One of the most important types of data is financial data. Small businesses may only have an administrator tasked with keeping the books in order. Larger companies, however, often have a whole department or at least one fully dedicated placement for that sort of information. Keeping banking information safe is important for your customers.
That said, it is also important for you. Good financial records can protect a company from money laundering, theft and other forms of fraud.
This is why the concept of chain of ownership or chain of custody is important. If you notice loss happening, you should easily be able to trace it to the person or department that is in charge of that level of ownership.
Legal Internal Controls
Nearly always, legal is its own department within an organization or is outsourced to a law firm. This is because there needs to be an extremely high level of expertise, and generally speaking, each type of law and copyright is different than others. In general, a legal department is not there to know the law for an individual. Instead, it works to protect company interests as a whole.
When dealing with legal reporting, you should always be aware that the lawyers supporting your company may not have subject matter expertise in your area. Defining what you know and what your legal department knows is pivotal in having a good relationship. Unless you are a lawyer as well, however, you don’t need to know the ins and outs of specific laws.
Employee Information Controls
The single most important asset for any company is its employees. Protecting them from things like phishing emails is as important to their security as it is to your company’s security. Your management teams need to have adequate systems in place to ensure that there is a level of internal control. This could include badging in and out of an elevator and specific log-in protocols.
3 Basic Purposes of Internal Controls
Internal controls exist to pinpoint a problem or other pain points before they become major problems that are harder to amend. This doesn’t mean that they are not going to be an issue for certain members of your staff or that they are not a problem.
As anyone in a large organization knows, there are plenty of systems that require workarounds that are in use and are successful. Instead, internal control purposes are to detect, prevent and correct in the long haul.
Detection of Problems
Once you know that a problem has occurred, you need to check your system and find out where, when and why it was allowed to occur. Looking for problems in a system should be built into your protocols. A real-life example would be any form of site crawler that looks for drop-off rates or bouncing. However, they are also there to draw attention to a problem.
A very simple explanation would be a cash drawer. When a manager comes on duty, it is her job to count the money, make any needed deposits and make the change if needed. Sometimes, an owner or higher-level manager will show up to do a count at an off period of time. These surprise searches are a form of internal detection. All detection has the same goal: defending assets from theft.
Preventative Internal Controls
While detection’s focus is finding out where something went wrong, preventative measures keep things from going wrong in the first place.
To stay with the cash drawer example: The manager may send an employee to make a deposit or get more small bills for the drawer. In many cases, she may send two employees to handle this task for their safety. These employees are less likely to be robbed when there are two of them. Another preventative measure would be fingerprint locks, passwords or lock-up procedures.
Corrective Internal Controls
When a problem occurs, it needs to be rectified. Typically, these errors are not found at the moment that they occur. Instead, they aren’t noticed until a diagnostic is run on your procedure via a computer monitoring system or by running through your internal controls report process.
Typically, there is a department or analyst that can read over diagnostic reports and then drill down the problem. When an error is made, there should be a chain of command report. For example, if an accountant notices a problem on the floor, he should be able to notify a manager who will then notify his boss. Training programs are one of the most common examples of corrective action taken by an employer.
Importance of Transparency
Like with most business tasks, it’s essential that employees understand why they’ve been asked to do what they have been asked. There are many situations in the workplace in which staff go through the motions without understanding why they are being asked to do so, and this can cause issues with engagement and compliance.
It’s important to emphasize to employees that internal controls reporting is about compliance. However, it’s more than just checking boxes. Explain to employees why they are doing what they are doing and encourage them to make suggestions and offer feedback for ways to improve internal reporting. The importance of internal controls shouldn’t be underestimated.
Writing the Internal Controls Report
All of these elements should be included in your internal controls report. In each period identified within the procedure (daily, weekly, monthly, quarterly or annually), the policies should be examined and reassessed. Then, a preapproved team of staff members should run through the policies as outlined.
The internal controls PDF may be written after the procedure manual has been followed to outline what was done correctly and what errors were identified. Then, list any issues that were identified through the course of the investigation. Consider alterations to your internal controls reporting process for next time based on what you’ve found.
- U.S. Securities and Exchange Commission: Illustrative Reports on Internal Control Over Financial Reporting
- Center for Audit Quality: Guide to Internal Control Over Financial Reporting
- The CPA Journal: How to Report Internal Control Deficiencies
- AccountingTools: Internal Control
- Lumen: Internal Control and Accounting System Design