What Are Internal Controls of a Business?

Businesses rely on internal controls procedures to keep their employees honest and to feel confident regarding their company’s assets and financial reporting. Specific internal control methods vary by company, depending on the specific operation of that business. Management needs to consider what type of internal controls best meet the needs of its company and implement those controls.

High Risk Areas

Every business contains areas of high risk for inaccurate reporting, theft or lack of proper treatment. The management in each company needs to identify which areas pose the highest risk for the business. This risk assessment includes determining the accessibility of employees or clients to sensitive information or company assets. This risk assessment also includes identifying the highest potential dollar impact of inappropriate employee or client actions. Once management identifies the highest risk areas, management can implement steps to minimize those risks.

Safeguard Assets

Companies use their assets to further the operation of the business. These assets include inventory, cash and equipment. Cash handling requires specific internal controls, such as reconciling the cash account regularly, separating the responsibilities of cash handling between multiple employees and auditing the cash transactions. Inventory requires safeguarding from customers and employees. Many retail stores use ceiling mirrors to watch customers and electronic devices to prevent customers from leaving the store without paying. Any business with inventory can team employees up when loading or unloading trucks to prevent an employee from stealing.

Ensure Compliance

Businesses report their financial and operational results to a variety of agencies, including the IRS and the SEC. Companies operating in specific industries, such as energy or banking, also report their results to government bodies that oversee theses industries. Each agency holds its own requirements for reporting, such as the specific information required and the format used to report the data. Businesses implement internal controls to ensure that specific reporting requirements are followed. These internal controls include seeking manager approval prior to reporting and obtaining a secondary employee review of the data.

Ensure Accurate Reporting

Financial reporting drives the business owner to continue growing the business or changing direction when necessary. The business owner needs accurate financial statements to make good decisions regarding the actions of the business. Internal controls ensure that each transaction is recorded and reported accurately.