Internal controls are procedures that companies develop to safeguard their assets and to produce accurate, reliable financial statements. When a company doesn’t have strong internal control procedures, fraud can occur much easier. Other issues that can arise include inaccurate financial statements, the inability to find certain documents such as invoices or purchase orders, or a higher than usual number of customer complaints.
Here are 10 signs that may indicate your internal controls aren’t as strong as they should be:
Internal Controls Framework
Earlier this year, the Committee of Sponsoring Organizations of the Treadway Commission (COSO) released its revisions and updates to the 1992 document Internal Control – Integrated Framework, which public companies should follow for required reporting to the Securities and Exchange Commission. The five main components of the original framework—control environment, risk assessment, control activities, information and communication, and monitoring activities—remain the foundation for the updated framework.
One basic fundamental of internal controls is the principle of segregation of duties. This means that different employees handle different areas of the accounting duties. If the same person handles all duties, it’s a sign of a weak internal control system. If one employee has too much control, he or she may manipulate documentation to deceive the company.
An organization develops procedures for recording, posting and filing documentation. If a document is lost, there is a good chance that there are problems in the company’s processes. Every process and activity an organization uses should have written procedures to follow. Without written procedures, employees may not know the proper procedures and may complete activities the wrong way. A strong internal control system has written procedures and policies for all business activities.
Organizations should protect themselves from possible threats by monitoring their internal control systems often and adjusting them to be stronger.
Financial Statement Audit
A company can get an objective look by having a financial statement audit. Companies hire auditors to determine how accurately the financial records are being kept. An audit can uncover problematic areas, threats, risks and other potential problems. If a company does not hire an auditor on a regular basis, these threats will be harder to detect.
If not otherwise required to have an annual audit, another option is to have an engagement by a CPA to document an understanding of both the design and effectiveness of the company’s internal control policies and procedures. This can result in valuable recommendations for improvements.
Internal Controls Help
Good risk management and internal controls are necessary for the long-term success of any type or size of organization. If you’re not sure where to start, contact Rea & Associates. Our team of Ohio accountants and business consultants can help you make sure that you are protecting your most valuable asset – your business.