Proper Internal Control Procedures

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Internal controls are used to maintain compliance to certain rules, regulations, and procedures of doing business. Internal controls are especially important for companies and businesses in industries which are heavily regulated, such as energy and banking. Internal controls can generally be lumped into five basic categories which include the control environment, the risk environment, control activities, information and communications.

Management Buy-in

  • Obtain management buy-in. Internal controls are only as important as management says they are; that is, without management support, employees will not take the time to implement and follow internal control procedures, especially if they add more time to the process. Management must steer the organization toward a controlled environment. The consequences for failing to comply to internal controls procedures must be strict and highly visible.

Organizational Behavior

  • Effective internal controls set the tone for the organizational behavior of an company. They can be viewed as the consciousness or ethical backbone of an organization. Internal controls, frequently referred to as ICs, must also focus on protecting the assets of the company, from its equipment to its human capital. To make them effective, managers must develop ways to systematically identify and manage the potential risks that could hinder or prevent the organization from being profitable.

Effectiveness

  • In order to make internal controls effective, upper managers need to clearly identify the activities each department needs to do in order to be in compliance with stated internal control objectives. Controls can be both preventative or detective (reactive), but they should not interfere with or hinder the productivity of work. The best controls are automated, such as an automatic email sent to obtain signature authority for purchases over a certain threshold. The effectiveness of the controls should also be tested on a regular basis.

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