Internal control is a system of policies and procedures that management uses to ensure the overall financial well-being of its business or organization and to comply with industry regulations. Both large and small organizations strive to undertake good business practices that will increase efficiency and profitability. Internal and external auditors produce reports documenting these practices on an annual basis. Although the internal control process is advantageous, it also has its disadvantages.
Risk Assessment
Risk assessment is an import aspect of internal control reports. The process involves identifying those factors and activities that may undermine the efficiency and objectives of an organization. The process is undertaken at all levels, starting from management to junior staff to even suppliers. Risk assessment is always ongoing so that management is aware of the best practices required to avert risk in the organization. Internal control reports evaluate ways in which an organization can manage internal and external risk factors.
Operational Efficiency and Effectiveness
To ensure the accuracy and completeness of their financial statements and produce reliable and timely financial and management information, businesses institute internal control measures. These systematic measures yield reports documenting budget allocations. By drilling down into specifically how monies were actually used, businesses can deter and detect errors, fraud and theft. Through these reports, organizations can determine how best to use and safeguard their assets and resources and, thus, maintain operational efficiency and effectiveness.
Threatening to Staff
Requiring that an organization produce an internal control report may be threatening to some employees and others who work with the organization. The internal control process is concerned with the evaluation of performance at all levels of an organization. Similar to the emotions that internal auditing produces, staff may feel that they are being scrutinized. Mistrust and covering up for one other may also result as a way of protection among staff members.
Resource Consuming
Internal control is an ongoing process that requires a lot of time and resources to carry out. Resources may include dedicated personnel who may require training in order to execute internal monitoring and control. For reports to be generated, there must be constant communication with internal staff, customers, suppliers, regulators and shareholders. Businesses must identify risk, track assets and resources and frequently update and manage financial statements.
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