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Power of Internal Controls

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Every business has complexity which can lead to both opportunities and challenges. Complexity has the ability to create uncertainty within an organization unless there is a solid foundation upon which management and employees can rely. For a business, this foundation is an effective internal control system. Internal control is a process that can provide management with an opportunity to achieve an organization’s goals and objectives in the areas of operational effectiveness and efficiency, reliable financial reporting, and compliance with laws and regulations.

Recently, I had the opportunity to present to a group of BP clients to highlight the benefits of an effective internal control system, including fraud prevention, more timely and accurate accounting information and improved operating efficiency.

The presentation focused first on reviewing the component areas of internal controls. The internal control system will look different for each business depending on the company’s complexity and risks faced. However, every effective internal control system should incorporate each of these five components:

  • Control Environment – The set of standards, processes and structures that provide the basis for internal controls across the company. Often referred to as “tone at the top.”
  • Risk Assessment – The process management goes through to review everyday processes and identify risks to the company.
  • Control Activities – The specific activities performed by employees to ensure that management directed tasks are carried out and risks are mitigated.
  • Information  and  Communication – The   process   of gathering information throughout the business to allow employees to complete their daily processes. Additionally, communication enables employees to understand their responsibility and their importance to company objectives.
  • Monitoring – Ongoing testing and feedback to ensure that internal controls are effectively designed and functioning. As a business evolves, the controls in place must follow suit.

The key takeaway of my presentation: while it can be challenging, it is ultimately management’s responsibility to design an effective internal controls system, and provide clear signals to employees as to why the system is important to adhere to and maintain over time. Having processes in place that are both documented and available for employees is also paramount.

While there are no guarantees against fraud, an effective internal controls system is your best prevention. Not sure if your system is designed properly based the company’s risks or its complexity? Consider a third-party review; at Berntson Porter, we provide assessments for companies to analyze their internal processes thoroughly and provide recommendations for how to strengthen your procedures. Visit the BP website or connect with your BP representative to learn more about how we can help your firm.

Steve Peterson, CPA, Senior Manager and Director of Assurance Services.

Steve can be reached at 425.289.7669 or speterson@bpcpa.com.