Who is Responsible for Internal Controls?

Who is Responsible for Internal Controls?

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The answer is definite. The management is responsible for establishing and maintaining the internal controls. Internal Auditors are also in the internal control system but the role of internal audit is performing evaluations and making recommendations for the improvement of internal controls. Moreover, each employee of the organization plays a role in either strengthening or weakening the organization’s internal control system. Thus, all employees need to have knowledge of the concept and purpose of internal controls.

Internal Controls are to be an integral part of any organization’s financial and business policies and procedures.

The objectives of internal controls are:

  • Protecting resources against waste, fraud, and inefficiency;

  • Ensuring accuracy and reliability in accounting and operating data;

  • Securing compliance with the policies of the organization;

  • Ensuring compliance with applicable laws and regulations;

  • Evaluating the level of performance in all organizational units of the organization;

  • Providing management with reasonable assurance that leave and payroll transactions are authorized, valid, complete and accurate;

  • Safeguarding leave and payroll documents from theft, loss and destruction; and

  • Internal controls are simply good business practices.

The benefits of good internal controls are:

  • Prevents errors and irregularities from occurring. If errors or irregularities do occur, they will be detected in a timely manner.

  • Ensures that issues arising from reporting errors are kept to a minimum and quickly resolved.

  • Protects employees:

  • By clearly outlining tasks and responsibilities,

  • By providing checks and balances; and

  • From being accused of misappropriations, errors or irregularities.

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CEO. The CEO has ultimate responsibility and “ownership” of the internal control system. The individual in this role sets the tone at the top that affects the integrity and ethics and other factors that create the positive control environment needed for the internal control system to achieve.

CFO. Much of the internal control structure flows through the accounting and finance area of the organization under the leadership of the CFO. In particular, controls over financial reporting fall within the domain of the CFO.

Financial Controller. Much of the basics of the control system come under the domain of this position.

Internal Audit. A main role for the internal audit team is to evaluate the effectiveness of the internal control system and contribute to its ongoing effectiveness. With the internal audit team reporting directly to the board of directors or the most senior levels of management, or both, it is often this function that plays a significant role in monitoring the internal control system.

Board of directors. A strong, active board is necessary. The board should recognize that its scope of oversight of the internal control system applies to all the three major areas of control: over operations, over compliance with laws and regulations, and over financial reporting.

All other personnel. The internal control system is only as effective as the employees throughout the organization that must comply with it. Employees throughout the organization should understand their role in internal control and the importance of supporting the system through their actions and encouraging respect for the system by their colleagues throughout the organization.