Following the Sarbanes-Oxley (SOX) Act of 2002, it is a requirement that companies establish Internal Control Procedures and to report whether they are adequate and effective.
Internal controls are the procedures and mechanisms that enhance accountability.
Internal controls could enable an organization to achieve compliance, and maintain a balance between objectives, risk and performance.
Although it is a legal requirement, organizations need to look at internal controls in terms of the benefits it brings to business management.
The drastic integration of technology into all business processes has necessitated internal controls not mainly as legal requirement, but as a tool that when integrated with management processes, is significantly beneficial to overall performance.
Automated internal controls provide numerous business solutions including the alignment of workflows across an organization, and an immediacy to detecting and flagging issues.
The benefits of automated, up-to-date internal controls notwithstanding, organizations could benefit more with the efficiency of such controls.
Some of the ways that organizations could enhance the effectiveness of their internal controls include:
- Identifying the key controls. It is not possible to achieve 100% control and it could be time-consuming and expensive to add controls to every element in operations. The goal is to optimize the levels of assurance while saving on time and costs related to control systems. Non-essential controls could be expensive, time-consuming and overall counter-effective. Also, using too much data could cause confusion and duplication within the controls.
- Establishing a holistic view of risk to optimize processes. An organization cannot afford to keep testing controls for every department and sector. Risk must be evaluated from a holistic standpoint. By determining what risks may arise from different stages of processes, it is only then that effective internal controls can be implemented.
- Having highly adaptable internal controls to enable swift changes when the direction of risk changes. Imagine having to re-establish new controls every time the risk direction changes. Risks can be highly unpredictable. To avoid being completely crippled by new risks because some of the elements of that risks could not be spotted by the controls in place, organizations must ensure that the internal controls they implement are highly adaptable.
- Lastly, consistency in control testing is paramount to generating usable and clear data. All departments must therefore use the same approach to measure elements of control tests to generate meaning data.
In conclusion, internal controls are very important to quality assurance of information be it financial or not. However, management, auditors and regulators must come to terms that 100% controls are not achievable. Its is not economically beneficial to audit everything and verify everything. Therefore, the target should be to have effective internal controls.
