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Better achievement of an organization’s objectives or goals, minimizing operational problems and improving accountability is only possible through the implementation of appropriate internal controls. This integral part of an organization’s management, ensures effectiveness and efficiency of operations. Private as well as public sector requires internal controls as a tool for monitoring activities, compliance management and risk mitigation.
Framework for Internal Control

It is essential to have certain standards in place to set a minimum level of quality acceptable for internal control activities. Following are some standards that every organization should maintain:

1. Control Environment:

“Discipline is the bridge between Goals and accomplishment.” A positive control environment provides discipline and structure. The management should maintain the integrity and ethical values within the institution. The way the agency delegates authority for operating activities and reporting relationships is highly essential. Competence should be the prime goal and should be achieved with knowledge and skill development brought about by appropriate training, counseling and performance appraisal of the personnel. Establishment of appropriate practices of hiring, orienting, evaluating and compensating of personnel is also very important.

2. Risk Assessment:

Every institution faces various internal as well as external risks which need to be identified and assessed through a standardized internal control framework. Quantitative and qualitative ranking, forecasting and strategic planning should be used to identify potential risks. Further, they should use statistical tools to analyze the identified risks and then come up with a mitigation plan. Various compliance risk management applications and software like VComply are easily available in the market. They provide a risk barometer to the organization to ensure certain proactive actions before the vulnerability turns to a threat.

3. Control Activities:

Risk mitigation steps through internal control activities is an integral part of an entity’s planning. These activities can take a preventive (predicting potential problems before they occur) or detective (identifying and acting against undesirable activities that have occurred) form. Some examples of control activities are the management of human capital, control over information processing, segregation of duties etc.

4. Information and communication:

An organization requires effective, reliable and timely communication of operational and financial data to meet its strategic goals. A transparent and organized communication system needs to be in place in every organization for the same, where horizontal as well as vertical transmission of data is possible.

5. Monitoring:

Continuous overall supervision is necessary for the smooth and efficient functioning of the entity. Internal controls include rules and regulations at workplace, like attendance policy, punctuality, discipline etc.

Failure to monitor the activities of personnel through internal controls can lead to severe damage to the company. Exceed Tax & Advisory Services was appointed to carry out an investigation for a client who had suffered severe losses due to the negligence of supervision of employees. A senior employee colluded with other employees to take advantage of her position and drain the company’s resources. Moreover, the employee neglected her duties of collecting outstanding debts and paying the industry pension fund and bargaining council. They did not pay Income tax, VAT, and PAYE to SARS. Thus, if this company had the appropriate internal control and compliance management in place, it could have avoided this financial loss.

Internal Control

Conclusion

Every company, big or small, will benefit from the introduction of internal controls. For instance, Skoda Minotti provided a supplier of brass and bronze ingot with recommendations that would enhance the company’s existing internal controls. Organizations implemented many of these controls which resulted in greater company security of liquid assets, fixed assets, accounts receivable, inventory and investments. Hence, expenditure on internal controls is a potential investment.

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