Internal controls are specific restrictions or policies that guide activities to reduce the chances of fraud, significant errors or unforeseen detriments to a business. Using controls lets you spot problems before they get out of hand and can prevent individuals from stealing from you. Having written internal controls will help your staff understand what they can and can’t do when performing their duties, which helps protect your company.

Prevents Fraud

One benefit of internal controls is a reduction in fraud opportunities. A simple example of an internal control aimed at reducing fraud is requiring employees to submit receipts in order to receive expense reimbursements. You might avoid this by setting a meal per diem or give a budget for tips, parking and taxis for employees who travel. Some businesses require two signatures on checks, while others mandate that a person who writes a check cannot sign it. Banks often request that businesses submit the signatures of people who are authorized to sign checks so the bank can verify checks before paying them.

Error Prevention

Some internal controls are intended to spot potential errors before they happen. For example, you might have two people review each payroll before cutting and distributing checks. Each person will independently total employee hours, calculate their earned pay and check the deductions. The two will then compare their numbers against each other’s. A production facility might do a limited test-run on an order, checking the quality of items that come off the line before it runs the complete order. A restaurant might have an opening and closing checklist of tasks employees must perform each shift to ensure health requirements are met and adequate food inventory levels are maintained.

Error Spotting

No matter how hard you try, you won’t spot every potential error at your company, and mistakes will happen. Internal controls can help you detect errors early and address them before they get out of hand. In some instances, a recheck of numbers, such as a monthly bank reconciliation, will help you spot errors that occurred once. In other situations, such as reviewing new contracts after 30 days, you might find ongoing problems. In both cases, your internal controls will help you rectify the situation.

Reduced Lawsuits and Insurance Claims

Having a company policies and procedures manual that lays out staff behavior restrictions can help you reduce the risk of lawsuits or costly insurance claims. Working with an employment expert, you create policies that address state and federal workplace rules and regulations, such as those covering harassment and overtime. Having controls that address workplace safety can help reduce accidents, lowering your insurance premiums and reducing workers’ compensation claims and negligence lawsuits.