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Four Tips for Successful Internal Control

Internal control is an integral part of a business' functionality, and decision makers should prioritize monitoring it and making it as efficient as possible.

According to the International Federation of Accountants (IFAC), recent financial crises demonstrate that many organizations - especially financial institutions - lacked proper risk-management and internal control, and many business leaders didn't understand the risks they would face.

Effective internal control is one of the best preventative measures companies can take to avoid business failure. In addition, because it allows organizations to manage risk and production value, internal control systems are an important source of business performance. Correct implementation allows companies to invest in opportunities while minimizing risk, saving time and money and therefore generating a competitive advantage over other institutions. The following four tips provide insight on what constitutes efficient internal control.

Align company goals with laws and policies
Effective internal controls should allow organizations to achieve their objectives by managing risks while complying with company rules and policies, as well as with federal and state laws and generally accepted accounting principles. These regulations shouldn't conflict with the achievement of business goals. Organizations should educate employees on all applicable laws and standards, and vigilantly monitor application. It's important for companies to encourage members to abide by risk management policies, and to incorporate respect for rules and regulations into company culture. IFAC recommends linking individual performance to the achievements of the internal control system to foster a sense of personal accountability.

Incorporate internal control into the big picture
Companies should view internal control as an integrated part of governance and risk management, rather than a separate entity. IFAC recommends that companies think of internal control as two sides of the same coin. Risk management should focus on identifying threats and opportunities, while controls should counter threats and take advantage of opportunities. Integration creates a system that supports efficient, ethical and profitable movement forward.

Plant the seeds of progress
The governing body responsible for internal control strategy and policy should adopt a system to evaluate and improve itself. It's a good idea for companies to determine the roles of responsible management, employees and internal and external assurance providers, according to IFAC. Cooperation between all should be fluid and effective. Individuals at every level should fully understand the need for internal control. Communication between managers and employees is crucial. Companies should also consider the value of thorough documentation.

Expect change over time
Maintaining effective internal control is not a static or predictable task. Just as risks and opportunities develop and evolve, so should an organization's internal control system to accommodate them. IFAC suggests monitoring the system periodically, in conjunction with yearly business planning, for example. While the internal control governing body should oversee system evaluations, organizations may also involve internal auditors to investigate strategic, financial and operational performance, as well as the risks associated with the company's business endeavors.

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