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The Importance of Corporate Internal
Control
Wolfgang Jaegel
The innovative developments in financial sector have led
to increased demand for an effective risk management as
well as sophisticated corporate governance. Every business
organization is subject to some kind of risks depending
upon several factors such as the products and services it
sell, the market in which it functions, the sources through
which it is financed, and the way it utilizes its resources.
Hence, it is important to coordinate every aspect of a business
organization in an effective way. Here comes the importance
of corporate internal control system. In other words, a
good corporate internal control has now become an integral
segment of risk management framework.
Internal
control systems (ICS) or corporate internal control is simply
the effective integration of activities, policies, plans,
and efforts of employees working together in an organization,
in order to achieve the business goals. The prime purpose
of corporate internal control is to promote economical as
well as efficient operations that go with the objectives
of an organization.
Other
prime purposes are to protect firm's resources against mismanagement
or fraud, to ensure whether the company's activities are
in accordance with laws and regulations, and above all,
to develop consistent financial as well as managerial data
in order to present them timely. In short, the activities
that are covered in the implementation of a good corporate
internal control are overseeing activities in connection
with authorizations and reconciliations, reviewing of employee
performance, security of assets, and segregation of duties.
A host
of benefits can be derived through the implementation of
an effective corporate internal control system. Since a
good internal control system ensures that the resources
are utilized only for their intended purposes, a great advantage
is that it helps to overcome the risk associated with the
misuse of organization's funds and other resources.
Another
prime benefit is that prevents errors and irregularities
by detecting them in a timely manner, thereby promoting
reliable and accurate accounting records. Also, a great
benefit is that it can quickly resolve issues arising as
a result of reporting errors. Above all, it protects the
interests of employees by clearly specifying them their
duties and responsibilities and safeguarding them from against
being accused of irregularities or misappropriations.
The
type of corporate internal control system adopted in a business
organization depends upon the varying requirements of an
organization. However, the most common types that are implemented
in many of the business organizations include preventive
internal control, detective internal control systems, and
corrective controls.
Preventive
control system is designed in such a way to detect and eliminate
errors and irregularities before they have occurred. In
detective corporate internal control, it corrects errors
and irregularities that have been detected. When comes to
preventive control system, it is designed to avoid errors
or irregularities from taking place in the first place.
No
matter it is of any type, an effective internal control
system consists of certain important steps, such as, control
environment, assessment of risk, control activities, information
as well as communication, and monitoring. The foundation
for all others steps involved in internal control systems,
control environment provides a framework for the organization
by including in it elements such as integrity and ethical
values.
Assessment
of risk involves the analysis and establishment of plans
in order to prevent the risks associated with the attainment
of company's objectives. Control activities include policies
and procedures formulated by management in order to ensure
the effectiveness of carrying out of activities with regard
to the achievement of organizational goals.
The
information and communication step covers understanding
of policies and procedures, validation of information, and
evaluation of employee performance. Perhaps the most prominent
of all steps of internal control systems is monitoring,
which is the practice of assessing the overall performance
of an organization.
Above
all, the full benefits of internal control system could
be achieved only if it is implemented in an effective way.
Hence, it is evident that it could be devised only by an
expert. Perhaps for this reason, now many learning centers
across the globe conduct specialized courses for corporate
internal control, such as, certificate in corporate internal
control, covering sessions such as concepts of Internal
Control, risk assessment and management, defect management,
and corporate governance and corresponding standards.
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