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Senior management continually seeks ways to improve control over the organizations they lead. Internal controls are implemented to keep public or private enterprises, non-profit and other entities — regardless of size — on course toward meeting established goals, while minimizing risk. Because internal controls serve many important purposes, there are increasing demands for improved internal control reporting and systems. Internal controls are viewed as tools that help reduce a variety of potential problems. Reviews of internal controls are an important part of financial audit and for business move forward.

What Are Internal Controls

 Broadly, internal controls are defined as a process that provides reasonable assurance on achieving objectives in:

• Integrity and ethical values of the organization

• Operating effectiveness and efficiency in desired path

• Reliability of financial reporting

• Organizational compliance

With laws and regulations Internal controls are typically put into place and championed by an organization’s board of directors, management and other personnel. Internal controls consist of interrelated components that are integrated with day-to-day management processes. While these components apply to all types of organizations, size and structure may dictate the scope of implementation. At smaller organizations, controls may be less formal, yet can still maintain effective internal control.

A Continuous, Integrated Process

Maintaining effective internal controls is continuous process. Controls will change over time as risks and processes change. Enterprises should have processes to update, identify and assess risks and to continuously monitor and measure the effectiveness of their internal control systems.

What Internal Controls Can Do

Internal controls can help achieve performance targets and ensure reliable financial reporting. They can help an enterprise comply with laws and regulations, avoiding damage to its reputation and other consequences. In summary, internal controls will help an enterprise achieve its objectives with minimal risk. Internal controls should not be just a short-term response to regulatory influences – the long-term benefits on improved financial reporting, risk assessment and stakeholder confidence are widely recognized by management as an investment in their organization’s future.

Risk

Business risk is any threat to achieving an enterprise’s objectives, often with negative effects and consequences. While risk is most commonly associated with financial implications, there are other concerns involving risk including short-sighted goals, ineffective business processes and a damaged organizational reputation.

Unattended risk has far-reaching consequences, such as:

• Flawed decisions based on incorrect, untimely, incomplete, or unreliable information

• Incorrect record keeping and accounting

• Fraudulent financial transactions

• Financial loss and exposure

• Negative publicity

• Noncompliance with relevant laws and regulations

• Inefficient and ineffective use of resources

Handling Risks

Eliminating all types of risks is nearly impossible and, most likely, not desirable because the cost may not outweigh the benefits. Alternatives to addressing risks such as transferring, accepting or mitigating the risk should be sought. A cost benefit analysis is typically performed to determine which type of approach should be taken. Regardless of the approach, the key to handling risk is an understanding and commitment to continually address risks. Risks are not stagnant, they increase and change as operational and regulatory environments change. In addition, new technologies, fierce competition, decentralized accountability, external scrutiny, and cost reduction practices all present new risks and continually challenge existing implemented solutions.

Reach me: iyappankannan@yahoo.co.in

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