In a generation in which companies must evolve at breakneck speed and competition is aggressive, business leaders must ask themselves how they can do more, better and for less! You need to maximize the quality and performance of your products and services, with the least amount of manpower possible, and as a manager, you’re no doubt increasingly faced with making important decisions to meet company objectives.
When I’m working with a customer on the production of his financial statements, and I see a profitability problem even with considerable revenue, an important question comes to mind.
Have management and corporate governance implemented internal administrative and operational control procedures enabling them to obtain a reasonable degree of certainty over the company’s financial information?
In this article, we’d like to share with you a few concepts and recommendations that will help you understand the relevance and benefits of establishing an internal control system within an organization.
What are internal controls?
In the first instance, internal control is defined as a set of guidelines, control mechanisms and administrative structure put in place by management to ensure the orderly and efficient conduct of the company’s business.1
What are the objectives and benefits of setting up control mechanisms?
When it comes to performance and transparency of information, a good control mechanism plays an important role within a company. It enables us to ensure :
System reliability: Enables timely decision-making, faster access to financial information and thus greater efficiency in business growth.
Capital protection: provides control mechanisms and ensures, for example, a balance between booked inventory and physical inventory to prevent ordering errors or even theft.
Optimum staff performance: Fair allocation of staff and segregation of duties maximize efficiency and the sharing of knowledge and skills. Indeed, segregation of duties for approving and recording transactions, verifying invoices, collecting deposits and much more is highly recommended, as these additional controls help reduce the risk of error or fraud…
Identification of fraud and error risks: Allows weaknesses to be targeted and reduced in order to minimize the potential for fraud and litigation that could have a negative impact on the organization.
Greater credibility with financial institutions: Increases the level of interest from financial institutions in the possibility of borrowing.
For better risk control, prevention is better than cure
It goes without saying that a company with an internal control system can better anticipate financial, operational and legal risks. Whether to avoid excessive costs or loss of revenue due to poor management decisions, for example, any manager will recognize that implementing effective measures to improve internal control is often less costly than the consequences of its absence.
Of course, every type of company has its own particularities in terms of an internal control system. However, we can observe similar recommendations for sales, purchasing, inventory and payroll for all companies. Here are just a few of them:
SALES
- Obtain written customer approval and deposit before production begins
- Customer credit check before order goes into production
- Executive approval and monitoring of credit notes issued to customers
Establishing this type of procedure avoids any ambiguity with the customer and reduces the risk of bad debts.
PURCHASES
- Reconciliation of purchase order, goods receipt slip and supplier invoice
- Follow-up on returned merchandise until receipt of a credit note
- Payment authorization by two managers
- Take advantage of volume discounts and payment terms
The importance of these practices gives us control over the quantity of goods purchased, the fair value paid and reduces the risk of error.
INVENTORY
- Carry out physical inventories sporadically and without prior notice, to ensure a balance between the inventory and the information recorded in the accounting register.
- Goods are stored in secure and controlled areas
This exercise reduces the risk of theft or loss of goods within the organization, and raises staff awareness of this potential problem.
SALARIES
- Control of hours worked and paid
- Reconciliation between net pay and total individual cheques
- A new employee’s conditions of employment are authorized before being integrated into the system
These procedures provide greater control over the organization’s payroll expenditure, and help avoid potential conflicts between employees and the employer.
Conclusion
To raise staff awareness of the importance of internal controls, you need the will of top management. If management and governance don’t believe in the benefits of different internal processes, employees won’t buy in. The simpler, better known and accepted the procedures, the more effective internal control will be.
In the jargon of the business world, we often hear that to succeed in business, you need to know how to surround yourself with people. Surround yourself with reliable employees and dedicated professionals who can help you implement internal controls and contribute to your company’s success.
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1 VILLENEUVE Jacques, Le contrôle interne guide de procédures , Développement économique, Innovation et exportation du Québec, Direction du développement des entreprises, January 1995.
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