The importance of internal controls and the objectives

The importance of internal controls should never be minimised as they are an essential aspect of risk management, financial health and compliance in business operations. They help a business owner (or the person/persons responsible) to monitor financial operations with accurate reporting and full oversight. This minimises the risk of damage to a business through fraud and helps to protect a business’s financial resources. Internal controls objectives are also aimed at ensuring businesses maintain accurate financial reporting and procedures to ensure compliance with South African company regulations and statutory laws.

Internal controls objectives – making complex transactions and systems transparent and compliant:

Businesses rely on often very complex systems to generate the kind of data required for financial and operational management, and if there is a fault in the data entry or the way the data is used, this will create financial risk. While risk is an inevitable part of any organisations operations, internal controls help mitigate that risk when it comes to financial operations. At the same time, internal controls make it difficult (and ideally as near to impossible as can be) for employees or directors to defraud a company. They are therefore the most important tools for risk management in business operations. Overall internal controls objectives can be broken down into numerous practical or individual objectives. This breakdown helps to illustrate the need for internal controls – and regular internal control audits.

Internal controls are designed to:

• Ensure that financial statements are accurate, and the processes and entries made to generate them are reliable
• Prevent fraud
• Prevent inadvertent errors in financial processes
• Ensure financial, accounting and statutory compliance
• Ensure financial operations adhere to internal policies and meet objectives
• Identify weaknesses or failures in operational, data and financial systems
• Identify data security threats
• Ensure inter-departmental financial compliance by identifying ‘gaps’ between compliance in one area and non-compliance in another

They are also designed to help a business:

• Minimise or prevent asset loss
• Minimise other financial risk from internal or external factors
• Manage and control operations and financial outcomes and help advise on strategy and objectives
• Plan and create frameworks for operational and financial system changes and improvements
• Streamline financial management, financial processes and applications and data applications – internally and with third parties

With such a broad-spectrum of objectives, it’s easy to see why the set up of internal controls and internal control audits are two of most essential aspects of the audit and assurance services provided by accounting and auditing firms

What could happen if internal controls are not implemented and maintained:

The importance of internal controls cannot be understated. While the core value to all companies is minimising financial risk from loose financial and accounting practices, internal controls can prevent catastrophic loss. Internal controls objectives related to preventing fraud and ensuring compliance and audit scrutiny are no less than lifesaving for many companies. Fraud prevention: You don’t think it will happen to you or your business. You trust your employees, your partners and your contractors. Yes – you do. Until one, or more of them, succumb to temptation. It happens all the time. Heard of the trusted employee/partner siphoning millions from company accounts? It’s a news story that crops up time and time again. Why wait for it to happen? Penalty prevention: If your financial operations are not compliant with statutory and other regulations, you could end up in hot water – fast. At worst, you end up in legal tangles, mountains of debt, or you lose your business outright. At best, avoidable penalties eat into your profits. It might not hurt too much when the going is good – but it will when the financial buffers your assets should provide have been thinned out by careless financial practices.