Internal Controls: The Key to Protecting Your Organization’s Assets

Sarah White
February 11, 2021

When we think about risk management, many topics come to mind.  First and foremost, we think of safety.   In the world of accounting, this entails the safeguarding of financial assets. The way that we accomplish this is through a solid set of internal controls.

Much like you would do when you consider buying insurance for a piece of property, one must weigh the cost of the protection against the risk of loss.  The implementation of internal controls involves costs associated with additional staff, technology, etc.

Fortunately, much can be done with existing resources and capabilities that are likely already present in your staff and system.  It simply takes a little up-front planning, good documentation, and consistency in practice.

To get started on the right path, here are five things you can do to see where your finance and accounting processes stand.  Use this as a checklist and ask yourself how are these things done today?  If you find yourself short in an area or two, use this as an opportunity to explore the capabilities of your staff and potentially members of your board to improve practices. 

Training and Systems
Before diving into any details, ask yourself one question – how well do our people understand their jobs and the systems they use?  It seems basic, but many organizations have found difficulties in their accounting departments because staff were not properly trained in the general ledger system and other applications used in their day-to-day tasks.

To remedy this, start with looking at your current system and interviewing staff to gauge how well they understand its capabilities within their areas.   Provide education and training where you see inadequacy.

Policy and Procedure Documentation
Along with training, another tool that must be utilized is documenting policies and procedures.    Sometimes, this documentation exists, but it is outdated.  Other times, it is incomplete or omits vital functions.  A good starting point is to look at your organization chart and determine where all of your processes reside. 

I recommend simple flowcharting after your initial exploration of staff responsibilities.  Tie this into the organization chart and make sure all critical processes fit under someone’s responsibilities.

Internal Control Analysis
Once you have procedures documented, you can then begin to determine where your internal controls stand within those functions.  Many smaller organizations dismiss this exercise as they do not feel they have the resources to add additional people to properly segregate key functions.  It is a myth, however, that only large organizations can have good internal controls.  Even if your organization is not large enough to separate every duty, you still have options when designing your internal control structure.  This could include cross-training, system access limitations, and monitoring reviews.

Timely Account Reconciliations
If there is one thing you take away from this discussion, it should be that account reconciliations should be done timely, accurately, and consistently.  The first thing to determine is if your staff know how to properly complete a bank reconciliation.  Then ask how often they do it and, finally, when do they do it.   These reconciliations should be performed with great attention to detail and they should be done every month.

Dynamic Budgeting and Monthly Reporting
The last step is to look at your budgeting process and how it is used throughout the year as a tool.  While budgets can seem like merely a compliance function, good ones can be used as a monitoring control and to make your monthly or quarterly reporting more dynamic.   This control is especially effective when the board of the organization is involved in the creation of the budget and ensures that it understands when actual expenses deviate from it.

These five steps are not meant to span the entire spectrum of accounting risk management, but they can provide a cost-effective means for getting started on the right path.  At a minimum, it will give one the opportunity to explore this aspect of financial management that may have not been a priority before.