Internal Controls: The Complete Guide

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Ensuring your finance team is working at their best isn’t always easy. You must consider many things to guarantee your operations run smoothly–accounting management and your internal controls are a big part of this. 

Without accurate accounting records, managers and financial leaders cannot make fully informed financial decisions, financial reporting, and monetary reviews to help your business grow. 

This guide will provide you with a complete overview of an internal control structure and why it’s required to provide reasonable assurance, and contribute to the health of your growing business. We will cover:

The main takeaway is that, while internal controls contribute to stakeholders’ workloads and can delay processes and procedures, especially if internal audits are conducted manually, it can have a significant influence on the control consciousness of the organization. Implementing and applying internal controls effectively is required to increase a company’s financial security and efficiency. Rules are followed for a reason, and a company’s internal controls are no different. 

All companies, big and small, are vulnerable to financial damage like fraud, embezzlement, and discrepancies. An internal control system is needed to regulate and automate away common errors in financial processes as a result.

What Are Internal Controls?

Internal controls are processes and records internal to a company, specializing in upholding and maintaining financial and accounting integrity of information. For example, an internal control framework is vital to prevent fraud. 

Optimization and automation are critical when ensuring the effectiveness of internal controls. Companies view and use these controls as an “interlocking set of activities,” ensuring redundancy beyond normative operating procedures within an organization. Assets are safeguarded, errors (especially manual) are minimizable, and operations are conducted in a manner befitting the company. 

Internal controls help finance teams mitigate and nullify risk, as well as ensure consistency when producing financial statements. When criminals can defraud even Amazon out of goods, every company needs robust controls in place!

Types of internal control

Companies primarily use three types of internal controls – detective, preventive, and corrective controls. These three control types can either be used in isolation or combination, depending on the intended use. 

These forms of internal controls are all useful to help prevent and react to company procedural issues before, during, and after processes are run. 

What Are The Internal Control Procedures In Accounting?

Internal controls in accounting are paramount to mitigate as much financial risk as possible while ensuring company processes and fulfilling procedures smoothly.

Internal control procedures in accounting consist of:

Who Is Responsible For Internal Controls?

While some employees may have more influence when determining a company’s internal controls, all employees contribute to a company’s financial risk and security. 

Some everyday interactions employees have with internal controls, and the responsibilities of these employees are as follows:

The bottom line is that everyone, whether a C-level executive or a member of a business or finance work team, that interacts with and uses internal controls is responsible for upholding the security such controls provide.

Common Issues With Internal Control Systems

Internal controls, like any auditing system, are not perfect. There is always room for improvement. For example, control activities in the attempt to control environments sets may frequently slow down the natural process flow, which can reduce its overall efficiency. However popular a metric, efficiency is not the only factor a company has to consider when determining success. 

The development of a system of internal control requires management to balance risk reduction with efficiency. Adding internal controls might result in management accepting a certain amount of risk to create a strategic profile that allows a company to compete more effectively.

Smaller operations may employ purely manual accounting and analog financial processing. This may increase the potential risk of fraudulent activities, human error, or discrepancies that fintech or standardized financial systems may pick up on. For example, Daniel Berenbaum, Vice President Finance and Asia Pacific Chief Financial Officer of Global Foundries, believes that “the risk of human error is high with manual processes. Additionally, you don’t always achieve the level of transparency that you would like.” 

Tradeoffs are typical, but a company must expect them to dissuade lower morale and improve internal control mechanisms. 

Finally, cutting corners can be an issue, as internal controls may delay processes. Employees required to complete specific tasks within a period may flaunt rules and regulations to accomplish work faster, even if that means increasing financial risk to the company. 

However, controls, internal or not, only work if stakeholders like employees are obeying them. If an employee does not understand the internal control procedures or completely bypasses them, the accounting system becomes inaccurate and does not pass through the proper reviews.

What Makes For Effective Internal Control?

While the specifics of internal controls themselves are dependent on the company, its goals, and industry, general guidelines can be beneficial to any company. External factors like applicable laws may influence some controls, and other internal controls may be initiated due to a CEO’s or finance leader’s concerns over a specific financial process or procedure. However, several means exist to ensure the effectiveness of internal controls.

Here is a four-step process you can follow to ensure your internal controls work:

Your workplace should have adequate internal controls already in place, as well as guidelines to maximize the effectiveness of these controls.

Why Effective Control Procedures And Financial Management Matter

Implementing robust internal controls is a means to an end. However, once implemented, stakeholders have to follow those controls. Naturally, as a company grows, the amount and depth of implementing internal controls like purchase approval processes will grow too – primarily if the company dedicates itself to growing among new audiences and markets. A system of internal controls tends to increase in comprehensiveness as an organization increases in size.  

Control costs 

Companies live and die by budgetary controls. On average, companies lose between approximately 10%-20% of their projected savings to maverick spending each quarter. Internal controls help control costs by catching and curtailing unnecessary spending to ensure better company health.

Ensure compliance

Compliance is necessary and straightforward to implement. Having the appropriate people with the proper controls and access within the audit system will ensure the correct purchase approval and optimize the financial system. Accountability is key. Compliance maintains the organization of your company or business, no matter the size. 

Eliminate fraud and protect your assets 

While manual errors in finance may never be 100% nullified, they are minimizable to a great extent by simply following internal control protocols. You can do this by maintaining visibility over the actions of involved stakeholders. Minimize risks at every step of the way for more streamlined and efficient financial operations and transactions. 

Companies are not immune to fraud, a multi-billion dollar industry, no matter how well their internal controls are implemented and followed. There is always room for error, so complacency is not an option.

Optimization With Automation 

Moving from manual to automated tasks will allow finance teams to focus on value-added activities that positively grow or impact the organization. Financial and reporting controls, and other finance functions can work across the organization to create added value and enhance performance.  

While it may be tempting to optimize and automate first, the most crucial step is to outline and implement internal controls. Once implemented, you can then audit company progress and evaluate whether (and at what point) controls need optimizing and automation. You can also optimize and automate incrementally using Agile project management practices.

Internal controls play an important role in creating a rigid system your organization needs to navigate financial processes. Investing in automated fintech solutions like modern financial management systems will boost your company’s efficiency and growth in the digital age. Giving your team a solid infrastructure to carry out important financial procedures correctly will not only enable this growth, but will act as a safety net in preventing foundational mistakes that have long-term adverse effects.


What are good internal controls?

Having any combination of strong detective, preventative, or corrective controls works to ensure an organization’s financial security and efficiency. This can include processes put in place to ensure compliance and prevent fraud.

What are key internal controls?

Key internal controls include is the three-way matching process. Matching the goods received note to the purchase order and supplier invoice prior to issuing payment is a good way to prevent fraud and keep accurate records for spend forecasting and auditing purposes.

What do internal controls do?

An organization will implement internal controls in order to protect themselves and their various processes from risk, ensure operations run more efficiently, as well as ensure employees follow company and legal policy.