4 Key aspects of an effective internal controls program

Effective internal controls are a must-have for any business. Organizations rely on accurate information, financial, operational or otherwise, to set their future strategy. Internal control measures are the key to ensuring this accurate information is available and up to date.

The importance of internal controls is well recognized. The global professional body for chartered accountants, the ICAEW, believes that “Controls designed to ensure that information, including financial information, is timely and accurate are essential to decision-making.” A pretty compelling endorsement of the need for effective internal control.

Fortunately, there are ways to ensure your internal control process is effective and comprehensive, from recognizing the limitations of company internal controls to making use of the latest internal controls management technology.

In this article, we explore:

• How effective internal controls can elevate assurances
• What effective internal control looks like in practice
• How to can you design, implement and maintain a system of internal control

What Makes an Effective Internal Control?

There are several criteria that determine what makes internal control measures effective. Good internal controls rely on:

1. A strong steer from the top of the organization: Internal control processes are designed to capture any deviation from the “right” way of doing things. A culture of compliance, set by senior leadership, creates the foundation of good governance — although a system of internal control is still needed to ensure policies and processes are followed.
2. Responsibilities divided between several employees: This is a basic step to reduce the risk of fraud or human error: one of the key components of internal controls should be that they are difficult to circumvent. Segregating responsibility for controls works towards this.
3. Implementing effective safeguards: Whether this comprises a zero trust architecture, an increasingly popular approach for internal controls in audit or other application controls; storing corporate documentation in a highly secure repository; or physical security measures, the features of a strong internal control system include steps to protect your intellectual property, corporate information and physical assets. Conversely, poor security architecture is recognized as one of the weaknesses of internal controls.
4. Regularly auditing and checking internal control measures: Control testing is one of the core components of an effective internal controls process. Does it still meet your organization’s needs? Are controls capturing any out-of-tolerance behaviors, readings or events? Increasingly, companies realize the benefits of using internal controls technology to strengthen and future-proof their internal controls by making documentation more robust and centralizing and automating the internal control process.

Effective Internal Controls for Public Companies

When we consider what makes an effective internal control, the same applies for public and private companies. The above components are equally relevant to both. What differs is the imperative to have, document and demonstrate internal control measures. For public companies, this can be a non-negotiable part of their remit.

Private companies, meanwhile, can learn a lot from their public counterparts about how to implement a system of internal controls that’s robust, rigorous and stands up to scrutiny.

Effective Internal Controls for Private Companies

Private company internal controls may be optional, but they are no less valuable than they are for public bodies. Using public company experience and identifying best practices among organizations whose internal controls are mandated can help you implement effective internal control measures.

Features of a Strong Internal Controls System

As part of your overall GRC program, designing internal controls is crucial. Once you have conducted a risk assessment and determined your key risks, you can design controls that best prevent or mitigate those risks. These might be technical, administrative, operational or architectural controls and could be manual or automated.

For best practice, all controls need to be documented. First, this helps those responsible for them to understand and correctly implement the controls as you’ve designed them. Second, it helps to evidence your approach for governance and compliance purposes.

Refer to the effective internal controls guidelines outlined above, along with accepted best practices and components of successful internal control processes to ensure you have covered all the bases in your internal control design.

Key Aspects to Consider When Writing Controls

To write effective internal controls, you need to:

• Identify who will be responsible for monitoring in each case
• Set clear expectations around the internal controls process
• Communicate clearly regarding how often monitoring should be carried out
• Document your processes and the internal control measures in place
• Consider whether technology and a degree of automation could support your internal control process, making it more reliable and consistent, saving time and reducing the potential for human error

Continuously Monitor to Maintain Effective Internal Controls

To maintain a system of effective internal controls that will deliver for your business in the long term, you need to:

• Regularly monitor the controls in place to ensure they are working correctly and identify any changes needed
• Periodically risk assess your approach to check that your controls manage current risks
• Ensure your approach is flexible to deal with evolving risks and scalable, to grow with your organization and the challenges it faces

The Next Step in Supporting Your Internal Controls Program

Design, implement and maintain an effective system of internal controls and you will take strides towards a more robust approach to GRC.

Centralizing and automating this internal control process will elevate your strategy further, enabling you to create a single source of truth that helps you to enhance productivity and reduce costs. Audit reporting is made simple and user-friendly, giving leadership teams real-time snapshots of risk management performance.

You can read more about how to automate internal controls and why exploring automation supports effective internal control in our article, Automating Internal Controls: What Does It Entail and What Are the Benefits?