Strong internal controls can keep a company healthy by helping to achieve four key business objectives:
- Safeguarding assets. The right controls protect a business’ physical and financial assets from fraud, theft, and errors. Likewise, proper controls quickly identify errors and fraud if they occur. One of the most essential concepts related to internal controls (and specifically to safeguarding assets) is the segregation of duties (i.e., separating incompatible functions) because it prevents a single individual from requesting, authorizing, verifying, and/or recording business expenditures.
- Ensuring reliable financial reporting. Owners and managers require accurate financial information to make informed decisions. Because solid internal controls help to maintain the validity of financial data, they also equip management to make more educated judgment calls.
- Maintaining compliance. Credible financial data enables organizations to fulfill their duties to file complete and accurate tax returns, as well as meet any financial reporting obligations (e.g., to fulfill loan covenants). Appropriate processes and procedures also allow organizations to meet other regulatory and statutory filing or reporting requirements.
- Accomplishing operational efficiency. Organizations typically operate more effectively with processes and procedures in place. A strong internal control environment can foster efficiency through automation of manual controls, removing unnecessary or duplicative steps in a process, or combining certain functions in a cost-effective manner. Finally, when financial data is consistent and easily accessible, management receives timely and relevant information to verify that activities are in-line with business objectives.
