Reasons to LOVE Internal Controls
Internal controls? Ugh, if just the mention of them makes you uneasy, you are not alone! Why should you care about these pesky internal controls (ICs)? Here are some reasons to love them:
- Cost savings: Establishing ICs help prevent fraud and errors such as preventing and/or detecting fictitious claims from being recorded and paid.
- Employee engagement: ICs help set expectations regarding integrity and ethical values, management philosophy and operating style, and your organization’s key business objectives, thus providing your employees with tools to make good decisions.
- Customer loyalty and confidence: ICs establish parameters so you can respond quickly, accurately and timely. Strong processes, supported by internal controls, are the underpinning to providing your customers with great service.
ICs should be developed for all risks within your organization. They help assure that policies and procedures are being followed, that you comply with applicable laws and regulations and that your financial statements are reliable and accurate.
The Committee of Sponsoring Organizations of the Treadway Commission (COSO) developed an IC framework that many organizations use to develop and implement ICs that are right-sized to them. The framework contains the following core components:
- Control Environment – sets the tone of the organization
- Risk Assessment – identify and analyze relevant risks
- Control Activities – actions that help ensure management directives are carried out
- Information & Communication – information is identified, captured and communicated in a form and timeframe that enable employees to carry out their responsibilities
- Monitoring Activities – ongoing evaluations to determine whether the core components are functioning properly
Documenting your ICs is critical so there is no room for misunderstanding and information is communicated properly to all employees.
This article is the first in a series focusing on ICs. We will cover the five core components in the next article and then focus on significant cycles (claims, underwriting, investments and financial closing and reporting).