Important Internal Control Activities That Every Organization Should Implement
Every organization needs strong internal controls to ensure the integrity of financial statements, promote ethical values, and drive transparency across the enterprise. Internal controls are the mechanism to do those things; controls help identify risks and reduce them to an acceptable level.
Vital processes supported by robust internal control systems allow an organization to comply consistently with all applicable laws and regulations and to earn confidence, trust, and loyalty among its stakeholders. Internal controls also play an essential role in preventing employees and others from committing fraud.
Conversely, a lack of internal controls can weaken the integrity of accounting and financial reporting. Costs can rise because of reduced operational efficiency and increased potential for fraud and other kinds of crime. Ultimately, these issues affect the company’s reputation and financial standing in the market
There are two examples of Internal Control Activities
Preventive Internal Control Activities
As the name suggests, the aim of preventive controls is to prevent errors or fraud from happening in the first place. These controls are essential because they are proactive and help neutralize problems that could cause a lot of damage if they occur.
Key preventive control activities include:
Segregation of Duties
Also known as separation of duties, this internal control activity divides responsibilities among multiple employees to minimize the risk of errors or inappropriate actions.
By segregating duties, organizations assure that no single person can perform, authorize, and record financial transactions, which reduces the potential to commit fraud. For example, enterprises should separate the duties and responsibilities for:
- Receiving cash or checks, preparing deposits, and reconciling deposits
- Entering new vendors and paying invoices
- Entering and approving expenses
