10 Reasons Why Internal Controls Are Important in your Business

Seep Gupta

28 Feb, 2023

In India, internal control is managed and governed by the provisions laid down under the Companies Act of 2013^[1] and the Securities Exchange Board of India. Internal controls are the systems, strategies and processes that an organisation or a business inculcate in the operating procedure to avoid or to prevent mismanagement and fraud in its financial statements. This article thoroughly deals with the benefits and reasons why organizations and businesses should implement internal control.

What is an Internal Control?

Internal controls are implemented by businesses to ensure that the reliability, accuracy and effectiveness of the financial documents or statements are maintained, and it is also done to achieve their goals and objectives. Businesses generally inculcate technological, administrative and some physical strategic tactics to better deal with their financial information and to prevent the leak and misuse of their confidential financial statements and documents. By implementing these, businesses and organisations can improve and can enhance their overall productivity and efficiency.

However, it is important to upgrade and update the internal control of the businesses to ensure that they are updated and in pace with the latest technology and the present business atmosphere.

Examples of Internal Controls in Businesses

Some of the common controls include physical controls, record-keeping, documentation, Information Technology controls etc. These examples are mentioned below in great detail below:-

• Some of the internal controls in the business include segregation of duties which involve dividing responsibilities or delegation of power among different employees working in an organisation according to the roles and responsibilities and hierarchy.
• Authorization and approval procedures include a clear-cut set-up of the authorisation and approval procedures about who can approve and approve transactions and under what circumstances.
• Internal controls, such as physical controls, including alarms, locks, biometric machines, cameras and other security measures, are used to restrict unauthorised access of an outsider or an unauthorised person.
• Record-keeping and other documentation are used to analyse and maintain complete and accurate records of all the transactions, and they also help in retaining relevant documents for a specified period.
• Internal controls such as firewalls, encryption, malware detector, passwords etc., which are often included under the Information Technology, are used to ensure the accuracy and completeness of data and are also used to protect confidential information from phishing attacks and from the hands of potential attackers.
• Proper risk management is necessary by implementing a proper risk management access system and implementing controls to mitigate the risks associated with the businesses.
• Regular auditing and assurance are necessary to ensure that the organisation are working properly and effectively, and it also helps in identifying the grey areas or any weaknesses which have the scope for improvement.

These are some of the examples of primary internal controls that businesses and organisations often use to reduce the risk of financial losses, improve the accuracy of financial reporting, enhance overall efficiency and mitigate the associated risks.

Implementation of Internal Control in Businesses

The procedure of implementation of internal control in businesses and organisations involves several steps. These steps are given below in detail:-

• The first and foremost step required is to identify the grey areas of an organisation or a business in which internal controls are the most needed and where the risks need to be identified and addressed.
• Next step is to identify the risk on which the internal control needs to be implemented. Assessment and evaluation of risks are necessary to prioritize the controls that need to be implemented to mitigate those risks.
• Next step is to establish the policies and procedures, which will make a blueprint and outline of the internal control processes to be followed. These policies and blueprints should clearly indicate the roles and responsibilities of the employees and the delegation of power of all the employees working in an organisation in accordance with the established internal control.
• Delegation of duties to each individual employee is also crucial for the appropriate implementation of internal control in businesses. This helps them in the seamless completion of tasks and makes only one person properly responsible for a particular task, thus making them accountable in case of any mishap conduct.
• Implementation of Information Technology controls such as passwords, firewalls and encryption are used to protect sensitive and confidential information, and these IT controls also ensure that all the transactions are recorded accurately and completely, and that relevant documents are retained for a specified period.
• In order to successfully implement internal control in a business or in an organisation, regular and periodic internal audits and assurance are necessary and crucial to ensure that all the operators, processors and systems in the organisation are working fine and in an effective manner and to identify any weaknesses or areas for improvement.

10 Reasons Why Internal Controls are Important

These reasons are listed below in an elaborated manner:-

• Effective controls help in ensuring compliance with the current and relevant rules and regulations such as tax laws, financial reporting, labour laws and industry-specific regulations.
• It helps in maintaining the integrity and accuracy of the financial statements and records and also helps to ensure that the financial documentation and reports are complete, accurate and reliable.
• Internal controls in businesses and organisations help to protect sensitive and confidential documents by preventing fraud, theft and misappropriation of assets.
• Internal controls also help in increasing overall productivity and enhancing the effectiveness of businesses by identifying inefficiencies, flaws and areas that need improvement.
• It also helps in informed decision-making by providing accurate, reliable and complete information, which eventually leads to strengthened relationships with stakeholders.
• It also helps in maintaining the positive image and reputation of the business and also protects it from negative publicity.
• It also helps in providing a foundation for growth and expansion as it helps in promoting stability and confidence in a business.
• Internal control is beneficial for businesses from a risk management perspective as it helps in identifying and mitigating risks which can protect a business from potential losses.
• It also helps in the clear delegation of different tasks to different employees working in an organisation which further helps in establishing accountability and responsibility, which eventually improves overall performance.
• It also helps in easier and more seamless cash flow, which further improves cash flow management and promotes transparency in the businesses.

Conclusion

To conclude, it can be said that internal controls in any business or organisation are really important to mitigate any risk and to prevent leaks of any sensitive or confidential information into unauthorised hands. It is also important from the business perspective as it increases the overall efficiency and enhances the productivity of the business. 

Also Read:
Internal Controls- A Guide for directors
Internal Control System- Analysis of Benefits & Limitations