Internal controls are essential for the proper operation of any corporate organization. By implementing effective internal controls, you can boost operational execution, assure regulatory compliance, and enhance reliable accurate financial reporting. In contrast, the lack of internal controls or poor implementation can result in compliance failures, sloppy reporting, operational inefficiency, and ultimately a lack of competitive advantage.
Internal controls are the policies and processes designed to provide reasonable assurance about the reliability of financial reporting, compliance with applicable laws, and efficiency of operations. Strong internal controls provide security to stakeholders by preventing non-compliance, operational failures, and other operational risks.
A comprehensive system of internal control enhances the benefit of these individual processes by designing complementary strategies to assure the protection of stakeholders’ interests, operational efficiency, and reliability of financial reporting at a more holistic level.
What Are the Five Components Internal Controls?
The Committee of Sponsoring Organizations (COSO) developed an integrated framework for internal controls that any organization can use. It describes the five components of internal controls, which can serve as a guide to determine how to improve the internal controls in your organization.
The five components are known by the acronym CRIME: Control environment, Risk assessment, Information and communication, Monitoring, and Existing control activities.
The control environment is an essential element of a company’s internal control system. The control environment refers to the management model, how authority is delegated, and its commitment to compliance with internal control policies.
The control environment is the “tone at the top” that enables compliance policies to be enforced throughout the organization. The behavior of the board of directors, managers, and other senior executives within the company lays the groundwork for compliance by other employees.
Once the control environment is established, it is necessary to understand the company’s risk landscape to develop good internal controls. The risk assessment component seeks to identify internal and external risks related to the company’s activities and their relationship to the company’s objectives.
Each company faces different risks, so this assessment is critical to developing a system of internal controls adapted to your company’s needs, considering the severity of the threats and the company’s ability to mitigate those threats.
For example, a company that often interacts with foreign government officials has a higher risk of non-compliance with the Foreign Corrupt Practices Act, which prohibits U.S. businesses from bribing those foreign officials to win business. Therefore, the internal control structure must take this risk into account to formulate effective compliance processes.
Information and Communication
The internal control framework component refers to the flow of information related to control activities to relevant personnel or authorities. Control activities should define information flows and standards for effective communication throughout the organization.
Management must seek out and be provided with relevant, quality information to make good decisions. Likewise, management must communicate effectively with the organization to support the functioning of internal controls. Anonymous tip lines may be beneficial for employees to report suspicious activities and suspected corruption schemes.
Implementing control activities and communication channels are useless without ongoing review and evaluation of the internal control process. Periodic monitoring assures that internal controls are fulfilling their intended purpose. It also flags defective controls before they affect the organization’s operability.
Existing Control Activities
Existing control activities are the basic processes that operate every day. These may include management approvals, digital security measures, segregation of duties, and other controls. As noted above, these controls should be evaluated to assure they continue to be relevant and effective.
How Can You Measure Your Internal Controls?
Even when monitoring of control activities is included within the components of the internal controls framework, this element by itself is insufficient to maintain the effectiveness of the internal control system over time. Moreover, this component may be limited by the knowledge and biases of the organization.
Periodic audits are critical to improving your internal control environment. With the help of internal or external audits, organizations can look at the whole picture of their internal control system and not just the isolated view of defective controls versus effective ones.
In addition, public companies subject to the Sarbanes-Oxley Act need to implement integrated audits annually to assure the effectiveness of their internal controls over financial reporting or their overall security.
Include ZenGRC in Your Control Plans
Small businesses may begin using spreadsheets to manage their controls, but internal and external stakeholders expand as their business grows. Planning for a more streamlined solution will save time and money in the long run.
The ZenGRC governance, risk management, and compliance platform is intuitive and easy to use. It seamlessly integrates with a wide range of tools, transferring data for you and mapping controls to all of your compliance requirements, including PCI, HIPAA, SOX, and others.
ZenGRC’s single source of truth ensures your organization is compliant and audit-ready. Policies and procedures are revision-controlled and easy to find in the document repository. Workflow management features offer easy tracking, automated reminders, and audit trails. Insightful reporting and dashboards give visibility to gaps and high-risk areas.
Schedule a demo now to discover how we help companies simplify, automate, and strengthen internal controls.