Structured Biiz

Internal Financial Controls

Financial Controls are checks, processes, policies and procedures that are implemented by business houses for the purpose of managing finances. Such Financial Controls may be in the form of pre and post transaction verifications and enable correct and accurate reporting of financial information. Financial Controls are required to be implemented to ensure mitigation of errors and frauds in the business. Such controls ensure adequate people at appropriate level are held accountable for the work done and also safeguard that errors and frauds do not go unnoticed despite complete automation in the recording of financial transactions.

The Financial Control System comprises of all the methods and procedures adopted to assist in achieving the objective of efficient conduct of business, ensures adherence to management policies, safeguarding of assets, prevention and detection of frauds and errors and checking the accuracy and completeness of the accounting records. Internal checks and internal audit are integral parts of the overall financial control system.

Efficient Internal Financial Control System

The Financial Controls are generally internal to an organisation. They may be different for each organisation as per the needs of each. An efficient Internal Financial Control System should provide for the following:

Types of Internal Financial Controls

The type of Internal Control System to be employed in an organisation depends upon the requirements and nature of the business. There are three types of Internal Financial Controls. The same are as under:

They are designed to discourage errors or irregularities from occurring. They are proactive controls that help to ensure departmental objectives are being met. From a quality standpoint, preventive controls are essential because they are proactive and emphasize quality. Examples of preventive controls are segregation of duties, approvals, authorizations, verifications, etc.

As the name suggests, Detective controls are designed to find errors or irregularities after they have occurred. They play a critical role by providing evidence to determine whether the preventive controls are functioning as intended or not. Examples of detective controls are review of performance, reconciliations, audits, physical inventories, etc.

They target at the correction of errors and irregularities as soon as they are detected.

What are the benefits of having a robust Financial Controls?

The advantages that accrue on account of having a robust Financial Control System in place are as follows:

What methods can be adopted and implemented for having a vigorous Financial Controls within an Organisation?

Data is the most powerful and key resource in an organization. Such Financial Controls should be in place that there is no delay in recording of data and no unauthorised access of data. Confidentiality of data should be of prime importance. Financial Controls must be such that audit trails or digital footprints are left behind for every action taken with data.

Before Financial Controls are designed and implemented in an organization, all the possible scenarios that have even the slightest chance of occurring should be thought through and documented.

Making projections and forecasts keeps an organisation closer to its ultimate goal. All the Financial Controls should be placed keeping in mind the ultimate target and the big picture.

Cash is the area where there is a maximum chance of frauds and embezzlements taking place. The credit policies of customers should be reviewed periodically and a strict maker-checker system should be followed for cash accounting and dealings.

Despite having the best infrastructure of Financial Controls, the chances of errors, frauds and negligence can never be nullified. Thus, detective and corrective Financial Controls should always be a part of any business’s plan.

Click here to know the 10 simple but effective Financial Controls that every small or big business should have in place in order to ensure correct financial reporting. 

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