Effective Internal Control Systems and Optimal Processes and Procedures

How do companies choose their strategic control systems? What is the nature and function of strategic control systems? What are the critical elements of strategic control systems? What is the nature and function of internal control systems as a critical element of strategic control systems? These strategic policy questions relate to the role of optimal organizational internal control systems, processes, and procedures designed to create and sustain excellence in operational performance that maximizes return on investment and shareholder wealth at the same time. while minimizing risk exposure and the cost of operations, simultaneously.

Clearly, an effective internal control system correlates with excellence in optimal operational performance and is critical to sound organizational systems and strategies designed to maximize the wealth-producing capacity of the business. In this series on organizational performance excellence, we will focus on relevant strategic control system issues and offer some operational guidance. The primary purpose of this review is to highlight a conceptual framework, quality management theory and practice, strategic relationships, and industry best practices. For specific financial management strategies, consult a competent professional.

Internal controls as an integral part of strategic control systems are a series of interrelated activities imposed on an organization’s standard operating procedures, designed to safeguard assets, minimize errors, and ensure that operations are conducted in accordance with standards. While strategic control systems establish standards and methods for measuring performance, determining whether actual performance matches expected standard performance, and taking corrective action, internal controls are designed to mitigate the level and types of risks to which you are exposed. exposed an organization.

Additionally, while control systems ensure operational effectiveness, control activities often slow down the routine process flow of business operations, which can reduce your overall efficiency. Consequently, the design of internal control systems requires management to balance risk mitigation with operational efficiency. This process can sometimes result in management accepting a certain amount of risk to create a strategic profile that allows an organization to operate more efficiently and effectively, even if it suffers occasional losses because controls have been deliberately relaxed.

Furthermore, all organizational strategies subject to constrained optimization have costs and benefits. The critical question is: Do the benefits justify the costs? In practice, executive leadership applies the net present value approach to weigh the costs and benefits of structures, systems, and strategies. The optimal option maximizes net benefit by equalizing marginal costs and benefits.

Some operational guidelines

In general, no organization is immune from misappropriation, embarrassment or corruption, whether inadvertent or deliberate. Many organizations do not assess threats of misappropriation or corruption until after they have occurred. Effective internal control systems must be designed to mitigate the level and nature of risk that organizations experience. In practice, as an integral part of internal controls, organizations take advantage of technology-enabled solutions to quickly scan the full spectrum of operational risks.

The ability to identify potential high-risk internal and external transactions quickly before they negatively impact organizations is critical to optimizing internal control systems designed to create and sustain operational performance excellence derived from business intelligence, mitigation of risks, data analysis and evidence-based knowledge driven effectively. organizational systems, processes and procedures.

In addition, internal controls must provide the mechanisms, rules, and procedures implemented by organizations to ensure the integrity of financial and accounting information, facilitate accountability, and mitigate fraud and the full spectrum of operational risks. In addition to complying with laws and regulations, and preventing employees from misappropriating assets or committing fraud, internal controls must facilitate operational efficiency and effectiveness by improving the accuracy and timeliness of financial reporting. The objectives of effective internal control should include regulatory compliance, accuracy, validity, physical safeguards, and error mitigation. Control procedures should include segregation of duties, access controls, random physical audits, standardized documentation, trial balances, periodic reconciliations, and approval authority.

Controls should always include policies and procedures in place to ensure the continued reliability of accounting systems. Accuracy and reliability are paramount in accounting systems. Without accurate accounting records, managers cannot make fully informed financial decisions, and financial reports can contain devastating errors. Control procedures in accounting should be divided into several categories, each designed to prevent fraud and identify damaging errors before they become problems or crises.

The control system must fully address regulatory requirements, meet stakeholder expectations, and protect organizations from potential catastrophic financial and reputational damage. When properly implemented and integrated, an organization’s technology-based anti-misappropriation, anti-bribery, and anti-corruption solution should use digitally-enabled analytics and advanced monitoring tools to help organizations scan the full spectrum of operational risks and compliance, so they can more intelligently anticipate, mitigate and manage risk.

While smaller organizations with limited resources cannot always afford elaborate internal controls, including segregation duties and decisions, the system of internal controls tends to increase in complexity as the organization increases in size. Establish standards and methods to measure performance; determine if actual performance matches expected standard performance; and corrective action should always be an integral part of effective internal controls.

Finally, internal control is most effective when it is embedded in and supported by a culture of continuous evaluation and improvement. Therefore, effective internal control should consist of an integrated process to ensure that the organization’s objectives for operational efficiency and effectiveness, reliable financial information, and compliance with laws, regulations, and policies are met. Controls should include the effective use of firewalls and encrypted passwords that limit internal and external access to critical business intelligence, property, accounting, and other financial information. Systematic measurement, analysis, and knowledge management require that the results of internal control be collected, analyzed, and used for continuous improvement.

In summary, control systems should provide processes and procedures by which an organization’s resources are directed, monitored, and measured. The internal control system should include human elements, such as a board of directors that exercises effective oversight and independent internal auditors that perform periodic random audits and unscheduled checks. Control systems, processes and procedures are critical to detect and mitigate high-risk activities and prevent various types of misappropriation and protect the organization’s resources, both tangible and intangible.