Internalcontrolisasystem.Companiesusethissystem.Thesystemhelpscompaniesworkbetter.Itmakessureworkersfollowrules.Itprotectscompanymoney.Itstopsmistakes.Itstopstheft.Itmakessurefinancialreportsarecorrect.Goodinternalcontrolisimportantforallbusinesses.Smallshopsneedit.Bigcompaniesneedit.Non-profitsneedit.Governmentsneedit.Itislikeaguardfortheorganization.

Everyorganizationhasgoals.Onegoalistomakemoney.Anothergoalistohelppeople.Anothergoalistogrow.Internalcontrolhelpsreachthesegoals.Itisasetofactions.Theseactionsguidetheorganization.Theymakesureeverythingrunssmoothly.Theymakesurepeopledotheirjobsright.Withoutcontrol,thingscangowrong.Moneycandisappear.Reportscanhaveerrors.Lawscanbebroken.Trustcanbelost.

Internalcontrolhasfivemainparts.Thefirstpartisthecontrolenvironment.Thisisthefoundation.Itisaboutthecompany'sculture.Leadersmustbehonest.Leadersmustshowgoodbehavior.Theysetthetoneforeveryoneelse.Ifleaderscheat,workerswillcheat.Ifleadersarehonest,workerswillbehonest.Thecontrolenvironmentincludesethics.Itincludesstructure.Itincludeshowmuchpowerleadersgivetoworkers.Astrongenvironmentiskey.

Thesecondpartisriskassessment.Companiesfaceriskseveryday.Ariskissomethingbadthatmighthappen.Acomputersystemmightbreak.Aworkermightsteal.Anewlawmightcostmoney.Acompetitormighttakecustomers.Riskassessmentmeansfindingtheserisks.Itmeansthinkingabouthowlikelytheyare.Itmeansthinkingabouthowbadtheywouldbe.Afterassessment,thecompanycanplan.Itcandecidehowtostoptherisk.Itcandecidehowtohandletheriskifithappens.

Thethirdpartiscontrolactivities.Thesearethespecificsteps.Thesearetherulesandtools.Theyhelpmanagerisks.Onecommonactivityisseparationofduties.Onepersonshouldnotcontrolallpartsofatransaction.Forexample,thepersonwhoorderssuppliesshouldnotbethepersonwhopaysforthem.Anotheractivityisapprovals.Amanagermustapprovebigexpenses.Anotheractivityisphysicalcontrols.Lockthedoor.Useasafe.Usepasswordsforcomputers.Counttheinventoryregularly.Theseactivitiesarethedailyworkofcontrol.

Thefourthpartisinformationandcommunication.Peopleneedgoodinformationtodotheirjobs.Theyneedtoknowthecompany'sgoals.Theyneedtoknowthepolicies.Theyneedtoknowtheirresponsibilities.Communicationmustgotwoways.Leaderstellworkerswhattodo.Workerstellleadersaboutproblems.Goodinformationistimely.Itisaccurate.Itiseasytounderstand.Asalesteamneedsdailysalesnumbers.Anaccountantneedscorrectexpensereports.Clearcommunicationpreventsconfusion.

Thefifthpartismonitoring.Thismeanswatchingthesystem.Thecompanymustcheckifcontrolsareworking.Managersdothis.Sometimesinternalauditorsdothis.Theylookforproof.Theytestthecontrols.Theyaskquestions.Istheseparationofdutiesbeingfollowed?Arethefinancialreportscorrect?Arethelocksused?Monitoringfindsweakspots.Thenthecompanycanfixthem.Monitoringisongoing.Itneverstops.

Smallbusinessesuseinternalcontroldifferently.Ashopownermaydoeverything.Theownermaytakecash,orderstock,anddothebooks.Separationofdutiesishard.Buttheownercanstillhavecontrol.Theownercanuseasimplecashregister.Theownercancheckinventoryeveryweek.Theownercanreviewbankstatementspersonally.Thekeyistobeinvolved.Thekeyistopayattention.

Bigcompanieshavemorecomplexsystems.Theyhavemanydepartments.Theyhavemanylevels.Theyuseformalpolicies.Theyhavetrainingprograms.Theyhaveinternalauditteams.Theyuseadvancedsoftware.Thesoftwaretrackstransactions.Itflagsstrangeactivity.Abigcompany'scontrolsystemislikealargemachine.Manypartsmustworktogether.

Internalcontrolpreventsfraud.Fraudiswhensomeoneliesformoney.Anemployeemightcreateafakevendor.Theemployeesendspaymentstothisfakevendor.Themoneygoestotheemployee.Goodcontrolscanstopthis.Thecontrolactivityofapprovalwouldcatchit.Theseparationofdutieswouldmakeithard.Monitoringwouldfindtheoddpayment.Astrongcontrolenvironmentdiscouragesfraudfromthestart.

Internalcontrolalsoimprovesefficiency.Goodcontrolsmakeprocessesclear.Workersknowthesteps.Theydonotwastetime.Theydonotmakeasmanymistakes.Suppliesareorderedontime.Billsarepaidontime.Reportsaredonecorrectly.Thecompanysavesmoney.Itusesitsresourceswell.

Technologychangesinternalcontrol.Computersstoredata.Softwarerunsprocesses.Thisbringsnewrisks.Hackerscanstealdata.Aviruscandestroyfiles.Asystemcrashcanstopwork.Companiesneednewcontrolsfortheserisks.Theyneedfirewalls.Theyneeddatabackups.Theyneedaccesscodes.Theyneedtotrainworkersoncybersafety.Technologyalsohelpscontrol.Softwarecancheckeverythingautomatically.Itcanreportproblemsfast.

Peoplearethemostimportantpart.Asystemisonlyasgoodasthepeopleusingit.Workersmustunderstandthecontrols.Theymustbelieveinthem.Theymustbetrained.Theymustbeheldresponsible.Ifaworkerfindsaproblem,theymustspeakup.Acultureoffearisbad.Acultureofhonestyisgood.Leadersmustrewardgoodbehavior.

Lawsoftenrequireinternalcontrol.Forpubliccompanies,theSarbanes-OxleyActisimportant.Thislawcameafterbigaccountingscandals.Itsayscompanyleadersmustcertifytheirfinancialreports.Theymustvouchfortheirinternalcontrols.Externalauditorsmusttestthecontrols.Thislawmakesleaderspayattention.Itprotectsinvestors.

Internalcontrolisnotperfect.Itcannotstopeveryerror.Itcannotstopeveryfraud.Cleverpeoplesometimesbeatthesystem.Controlscanalsocosttoomuch.Averystrictsystemcanslowworkdown.Thegoalisbalance.Thecontrolsshouldbereasonable.Thecostshouldnotbemorethanthebenefit.Thesystemshouldfitthecompany'ssizeandneeds.

Dailyoperationsrelyoncontrol.Whenacashiergiveschange,thatiscontrol.Whenawarehouseworkersignsforadelivery,thatiscontrol.Whenamanagersignsatimesheet,thatiscontrol.Thesesmallactsbuildthesystem.Everyoneplaysarole.Trustinacompanycomesfromthis.Customerstrusttheywillgettherightproduct.Investorstrustthefinancialreports.Workerstrusttheywillgetpaid.

Buildingacontrolsystemtakesthought.First,understandthebusiness.Whatareitsmaintasks?Whereisthemoney?Whatarethebiggestrisks?Second,designthecontrolactivities.Makerulesthatmakesense.Makethemsimpletofollow.Third,telleveryoneaboutthesystem.Trainthem.Explainwhyitmatters.Fourth,watchthesystem.Checkit.Auditit.Fifth,fixwhatisbroken.Updatethesystemwhenthebusinesschanges.

Internalcontrolisapracticaltool.Itisnotjusttheory.Itisusedeveryday.Itisinthelockedcashdrawer.Itisinthetwosignaturesonacheck.Itisinthemonthlyreport.Itisinthesupervisor'swalkthroughtheoffice.Itisquiet.Itisoftenunnoticed.Butitisalwaysthere.Itkeepsthebusinesssafe.Ithelpsthebusinesssucceed.Itprovidesorder.Itprovidesconfidence.Abusinesswithoutcontrolislikeacarwithoutbrakes.Itmightgofast,butitwillcrash.Goodcontrolletsthebusinessdrivesafelytowarditsgoals.