Whether you are an auditor in a privately-held company on the path to an IPO or planning your SOX roadmap for the upcoming year, part of an auditor’s responsibility is to influence and convince management on the importance of internal controls compliance. This article explains the importance of internal controls, including seven ways that effective internal controls can strengthen your business.
What Is an Internal Control?
Internal controls are processes designed to help safeguard an organization and minimize risk to its objectives. Internal controls minimize risks and protect assets, ensure accuracy of records, promote operational efficiency, and encourage adherence to policies, rules, regulations, and laws. Many different types of internal controls exist — they can be preventive or detective, automated or manual, and all of these are impacted by people.
Compliance and control are often used synonymously, but in an audit context, compliance and control represent two parts of a successful process. Control is the part of the process designed to accomplish a goal. Compliance is the execution of the process that was designed. For example, we have the objective to protect the information on our computers. The controls we put in place include requiring a password, setting password complexity rules, and changing the password every 90 days. Compliance is actually changing the password and meeting the complexity requirements.
Controls are important, but these are never perfect. In the example above, an individual could meet internal control compliance but invalidate the controls but writing their password on a post-it note stuck to the computer.
Why Are Internal Controls Important?
Every organization exists to accomplish some objectives, but there are many risks that impact achieving those objectives. Internal control compliance is put in place to mitigate the risks to give the organization a better chance at achieving its objectives.
Well designed internal controls keep the organization operating efficiently and effectively and the controls can help maintain compliance with regulations. A few key questions are common when discussing internal controls:
What are internal controls examples?
Examples of internal controls include locking your home when you leave, reconciling bank statements, and performing user access review on critical systems. Remember, compliance and control go hand in hand. You can have the best lock on your door, but it only works if you use it when you leave.
What are key controls in internal controls?
Key controls are processes designed to mitigate risks without relying on secondary controls. Key controls are usually the primary control process. For example, the lock on the door may be primary with an alarm as a secondary if someone breaks the lock.
Who is responsible for internal controls?
Management is responsible for their own controls. Audit must remain independent from the control process so that we can test the controls without any bias or conflicts of interest.
Internal control compliance plays a vital role in ensuring your organization’s operational, strategic, compliance, and reporting objectives are met. As you meet with different control and process owners — whether they are new to their role or have been a control owner for many years — or look for support from upper management, here are seven reminders on why internal controls compliance is so important:
How Does an Internal Controls Program Affect Your Business?
1. Achieve operational objectives.
Internal controls are designed to provide reasonable assurance regarding the achievement of operational objectives, such as the effectiveness and efficiency of operations, accurate and reliable financial reports, and compliance with applicable laws and regulations.
2. Mitigates risk and improves process performance.
An effective internal control environment ensures an organization’s resources are used for their intended purposes, minimizing the risk of misuse. It also allows for greater efficiencies when clear processes and guidelines are outlined.
3. Improves accountability among business and process owners.
Controls are owned by key members of your organization. These individuals are responsible for monitoring and performing internal controls throughout the year, not just during an audit.
4. Stabilizes internal operations and business functions.
C-level executives will now have better control and visibility into how the company is operating and what processes are being followed.
5. Indicates stronger confidence in your financials.
Stakeholders will have more confidence in your financials. Internal controls and/or Sarbanes-Oxley (SOX) compliance indicates a stronger investment. By implementing internal control structures prior to going public or being purchased, the company can save costs and reduce the number of challenges during a sale.
6. Reduces external audit fees.
Organizations with established internal controls may be able to reduce the external auditor’s scope, time, and fees. You can also reduce the need for revisions and rebuilding the program after an external auditor review.
7. Speeds up the certification process.
If your company is private, it is becoming increasingly common for lenders and other businesses to require companies to sign off on specific internal controls as part of their periodic certification process. Be ready. If your company already certifies controls then managing PBC requests and certifications can be time-consuming if not given the appropriate attention.
If you’re just starting your program, how do you prepare for internal controls?
Start with a thorough risk assessment and determine where your key risks and operational concerns exist. Preparing for regulations like SOX early on will reduce the need for revisions and rebuilding the program the subsequent year. It’s like building a house. You can build it from the ground up, or you can find the right framework that will help you set a solid foundation.
By the numbers
Sadly, nearly 50% of companies still manage their internal control procedures on spreadsheets, creating a number of inefficiencies in version control, administrative work, and file management. Consequently, 70% of the 5,000 to 10,000 hours spent on these programs annually are spent on administrative tasks — mainly reconciling and managing spreadsheets. Fortunately, 30%+ of those costs can be eliminated by incorporating an effective software tool.
Adopt the right technology environment
Throughout implementation, the IPO process, and as your company matures, your organization will need a single source where your internal controls environment lives and evolves. You will also need to manage PBC requests, certifications, documentation, audit trails, and more. Not only does AuditBoard come with a library to help kickstart your internal control compliance program and a team of audit experts, but our WorkStream solution manages all the coordination and data collection between process owners and auditors. To learn how AuditBoard can help you manage and streamline your internal controls program, contact us below.