Quite simply, strong internal controls serve as the cornerstone to establishing a healthy, ethical and optimally running corporate culture.
Developing and implementing an internal control environment that reflects your organization’s values, especially if your values feature preventing fraud and creating a harmonious environment, is vital to the overall health of your organization. Preventing fraud and promoting ethics is the best approach to achieving organizational goals while maintaining an exemplary reputation with your employees, customers, stakeholders, and within your industry and beyond.
A Few Quick Facts About Fraud
Before launching into our official conversation about building your own internal control environment, we thought it might help to understand more about fraud in today’s business culture.
The QuickBooks Resource Center has shared the findings of a 2014 study from The Association of Certified Fraud Examiners (ACFE), revealing that a typical business loses a median of five percent of revenues each year due to fraud. Those numbers add up to astronomical proportions on the global stage, totaling to around $3.7 trillion each year.
Further, executives admit that most of the time when fraud occurs, it is an inside job. What’s worse is that such fraud could have been prevented by having designed a better prevention program, or in other words, a full set of internal controls that complemented their business.
Fraud not only causes financial losses, but it also erodes employee morale, decreases productivity, harms employee reputations, breaks stakeholder trust, and ultimately damages the brand. This type of fallout can be prevented by designing and establishing a strong set of internal controls that focus on preventing fraudulent activity from employees and employers.
What Is an Internal Control Environment?
One of the most common definitions of internal control is that it is a process designed and put in place by an organization’s board of directors, management and other responsible personnel to provide reasonable assurance in pursuit of the business’s achievement of objectives, according to the Committee of Sponsoring Organizations (COSO).
Following are some common descriptions of a working internal control environment:
- In an internal control environment, competent staff understand their responsibilities, as well as the limits to their authority. These people are also knowledgeable, mindful and compelled to do what is right, as well as doing what is right correctly.
- Employees understand the importance of committing to faithfully following the organization’s official policies and procedures to abide by its ethical and behavioral standards because it is what is right.
- The set control environment covers both technical competence and ethical commitment. The intangible aspects of internal controls are crucial to promoting and fostering an ethical environment.
In an ethically-based environment—one that is designed and executed properly, with a collective attitude based on doing what is doing right for the sake of doing it right—internal controls reflect the values of your organization to your employees, customers, stakeholders and the general public. With strong internal controls, you build an atmosphere in which everyone conducts their activities and carries out their control responsibilities with an attitude always devoted to good ethics.
The Five Key Components for Any Internal Control Environment
Following are five well-established components for internal controls that consistently reap good results and should be considered for any internal control environment:
Serving as a baseline, a control environment features a set of standards, structures, processes and policies. Together, these components set the foundation for performing internal control functions.
Risk assessment is a process commonly used to identify, evaluate and manage risks.
These risk-mitigating activities are performed under the direction of management and include the business’s policies, procedures, techniques and mechanisms for the achievement of organizational objectives.
Information and Communication.
Strong communication of information allows for better and easier performance of control activities, as well as making it simpler for everyone to understand internal control responsibilities, internal and external to the organization.
Monitoring control activities with ongoing evaluations and periodic internal audits is vital to preserving and continually improving any internal control environment.
Here Are a Few Best Practices to Consider as You Establish Your Organization’s Internal Control Environment
Besides the five key components of internal control, there are a few additional best practices to keep in mind.
Create a Clear Path to Effect Change
The first step toward designing an internal control environment that is perfect for your organization is to stop and take a look at things as they stand. After that, consider five important steps to bringing it all together.
Simply put, decide on the type of control environment that supports both your business goals and your ethics.
Work with experienced auditors and other professionals to learn the skills needed to design, implement and operate a healthy internal control environment.
Reinforce employees’ drive to ethical excellence with appropriate incentives and rewards.
A strong auditing team to help with internal auditing preparedness is one resource that will pay off with a strong internal control plan. Also, build an in-house team to help you build your internal control structure and ensure that the staff is all on board.
As you put all the rest of the pieces together, you will see your plan emerge, as well as how to achieve it all with less stress and frustration for everyone.
Develop Strong Human Resource Policies
Many times, cultivating an ethical environment starts with hiring the right people who share your organizational vision. Beyond that, work with your human resource department to develop the following strategies to improving your control environment at the staff level:
- Disciplinary and Corrective Actions
Put It All In Writing and Send Regular Policy and Procedure Updates
Once you have designed your internal control environment, create a manual that lays out your policies, procedures and ethical expectations. Any time that there is a change, be sure to provide an update to all staff members.
We Can Help You Set Up a Solid Internal Control Environment That Offers Protection without Hindering Profitability
Are you ready to design and implement a solid internal control environment? We can help. Our team at I.S. Partners, LLC. appreciates the chance to work with companies devoted to high ethical standards and fraud prevention. We can help you create a highly functioning internal control environment that only enhances your organizational operations, culture, reputation and profits.