10 Reasons Why Internal Controls Are Important in your Business
Internal controls are measures and tools to protect the interest of the company against wrongdoings. It ensures that a company complies with the state and federal laws and regulations in managing the financial data of the organization.
The internal controls prepared by an organization also help in preventing frauds, ensuring the integrity of the financial data, and promoting accountability. The internal controls of each company are different from the other and are designed by keeping in mind the size of the company and structure. Efficient and effective internal controls help in meeting the objectives of the company.
Given below are some of the reasons why internal controls are important for business:
- Helps decrease audit fees- Properly established internal controls reduce the need for having external audits reducing the fees of audits. When an organization provides a clear structure of the implementation of internal controls and their results, this reduces the need for revisions or the need for the rebuilding of the entire internal control after an external review and audit.
- Recognizes SOX Act- The main purpose of establishing SOX was to maintain accountability in an organization and maintain internal controls for financial reporting. The SOX Act is a federal law that was enacted to protect the investors and ensure that the organization provides reliable and accurate disclosure of finances. By following the SOX Act, companies gain confidence in the investors and gain trust in the company’s management of financial data.
- Produces financial statements on time- Timely preparations of financial statements help management in making future decisions of the company and also protect stakeholders and the reputation of the company. Regular financial statements help in identifying and correcting small errors which help in building trust and proving the company’s transparency.
- Helps reduce errors- Internal controls help in reducing errors by defining procedures and protocols which reduce mistakes of the employees and make improvements when needed.
- Improves Accountability- Internal controls that are created with designated roles for key members help in reducing errors and improving the functioning of the procedures. This leads to improvement in accountability when clear protocols are maintained on the transmission of data, recording of data, and data sharing. Improvement in accountability means the company stays in compliance with statutory and regulatory filing requirements.
- Helps keep tasks separated- Internal controls ensure the duties are separated for different persons as this avoids conflicts of interest and reduces the chances of mismanagement in finances. Separating duties also ensures that a system of balances and checks is established so every person does not have access to all data.
- Organized information- A properly organized data of any organization helps in preparing for events such as litigation and external audits. Internal controls protect the interest of the clients by creating systems that would file client data or documents, or by putting restrictions such as the requirement of passwords to access data. Information organization also helps in improving efficiency by ensuring the security of financial data yet accessible.
- Stabilizes operations- When the protocols of company operations are in place, the organization meets the objectives in a better way. Management controls the operations in a better way and checks whether the procedures are being followed in the right manner or not. A stable operation or an organization defines the roles of the employee, effectively manages the information, and has detailed processes in place to identify problems and make improvements.
- Improves process performance- Once the processes are implemented in the right manner, the continuous monitoring of the processes helps in making apt decisions by the management and checking their effectiveness if it needs additional attention.
- Improves operational efficiency- The efficiency of the operations can be improved by applying internal controls as it helps in removing duplicate and unnecessary steps in a process or procedure. Improvement in operational efficiency allows management to get timely information about the organization which helps in verifying the current operations and checking whether the company's objectives are met or not.
So, it is very much important for organizations to have internal controls and it improves the overall performance of the organization.
NSKT Global understands the importance of internal controls for small businesses. We help small businesses reach their full operational potential by helping them to implement correct internal controls that will save them from staggering losses and fraudulent activities.
We are delighted to provide a free 20-minute business consultation. (The session will center on providing you with specific suggestions to help your business thrive.)