inFocus: What makes a healthy business: An internal control perspective?

Date: October, 2014 Internal controls

This article was originally published in the Fall ’14 inFocus Issue.

Health can be defined as the overall human well-being of body and mind. It is a dynamic condition, resulting from the body’s constant adjustment and adaptation in response to stresses and changes in the environment for maintaining an inner equilibrium.

The same concept of health can be applied to the overall state of your company, meaning that a healthy business is one that is constantly adjusting and adapting to the environment in which it operates. A company’s ability to change is impacted by its resources, which not only includes cash on-hand, but current information on the company’s performance. Without proper systems in place, it may be hard to understand the resilience of your business when the time comes to respond to changes in the business environment.

One significant factor that contributes to keeping a business operating in tip-top shape is having effective internal controls. Such controls help create peace-of-mind by ensuring data used to generate reports is accurate, resources such as assets and cash reflected on the books are actually available for use, and information can be easily accessed.

This article will illustrate the importance of having checks and balances in place, explain what an effective control looks like, and help to identify measures to establish or improve controls to guarantee your business is operating in a healthy manner.

Data integrity is crucial in a business of any size to enable a user to rely on the inputs used to generate performance metrics, such as interim statements or aged listings. Having controls in place ensures there are an appropriate number of eyes overseeing business processes to prevent errors from being made. An internal control that confirms information is correctly entered into the system will place another level of review or validation into the process. Easy steps to take may include the implementation of account reconciliations and having the appropriate person review work performed and data entered into the system.

In addition, business owners must have confidence that their resources are not vulnerable to fraud or misappropriation. In a healthy internal-control environment this is referred to as “safeguarding of assets” and can be implemented using a variety of measures. Successful controls will ensure only the appropriate staff is granted access to vulnerable assets and that no one individual is accountable for handling funds. For example, restricting access to funds by locking away blank cheques and petty cash, as well as segregating the duties related to handling receipt and payment of funds between different individuals, will drastically reduce risk. Other easy steps could include implementing access controls, such as passwords, limiting access to secure information and data to appropriate personnel, or maintaining physical security over inventory that can easily be stolen.

Just because something hasn’t gone wrong yet does not preclude the occurrence of future incidents. Efforts made to produce accurate data and secure assets will not yield the desired effect unless they are clearly communicated, monitored, and updated as necessary. Employees must understand the importance of internal controls in the workplace and that they are being enforced. Knowing that someone is keeping a watchful eye places additional pressure on staff to take care in their work and their broader role within the organization.

With owners and managers, understanding the benefits that internal controls can provide – accurate data and the ability to produce meaningful reports, control over assets, and attentive employees – they can take the necessary steps to safeguard the health of their business.

Connect with the Author

Lauren Cole, CPA, CA, Manager, Audit & Advisory

Lauren Schreiber has been with Crowe Soberman for five years. She provides insightful advice to clients on issues relating to accounting, finance, and operations. Lauren provides services in financial statement preparation, budget forecasting, and cash-flow projections and analysis.

Connect with Lauren at: 416.963.7137 or lauren.schreiber@crowesoberman.com.

Specific professional advice should be obtained prior to the implementation of any suggestion contained in this article.

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