The Importance and Resulting Opportunities of an Effective Internal Control Framework

01 July 2021

The-Importance-of-an-Effective-Internal-Control-Framework

 

Over the past couple of years, a significant number of businesses operating within many different markets and industries have been observed to devote increased resources and efforts towards the bolstering and general enhancement of their internal governance structures, operating procedures and holistic internal environment. This was mainly as a result of the ever-increasing regulatory requirements imposed by regulatory bodies and their own acknowledgement of the crucial materiality of such a field.

 

Most of these businesses have subsequently gone on to experience substantial positive trends across all dimensions, finding themselves in an ameliorated position to achieve their established objectives and strive towards greater success.

 

The main reason behind the attainment of such long-term benefits is that an enhanced internal control framework allows management to have complete oversight and control over operational practices whilst boosting their overall effectiveness and efficiency; thereby allowing the implementation of improved asset-safeguarding practices, risk assessment procedures, internal monitoring policies and regulatory compliance standards.

 

It is important to highlight that each business’ internal control structure is explicitly unique and will differ significantly across the various industries and markets in existence. Businesses need to work diligently to identify the best possible internal control solutions which guarantee the best practical results, to be adopted and implemented in a manner which adequately addresses operational risks without significantly augmenting internal cost structures.

 

The Benefits of a Tailored Internal Control Framework

Despite their characteristic uniqueness, each business’ internal control framework is primarily implemented with the aim of achieving the following specific results:

 

1. Enhanced Internal Operations

The designed internal controls constitute the formal documentation and delineation of all internal reporting lines and operational processes to be carried out by each key department within the business’ governance structure, aiding in the implementation of adequate segregation of duties (encompassing a system of periodic internal verifications) and providing staff with a steady guideline on their duties and responsibilities, thus maximising their potential output whilst minimising the risks of establishing inefficient ad-hoc procedures.

 

2. Timely Risk Mitigation

Internal Audit methodologies are perennially designed via the utilisation of a risk-based approach, whereby businesses conduct risk assessments encompassing all their various operational dimensions to serve as the foundational pillar of its internal control framework. The resultant high-risk areas are afforded the uppermost priority by process owners (a business’ first line of defence) and internal auditors (third line of defence) alike to assess whether adequate internal controls are in place to mitigate such risks.

 

3. Prevention and Detection of Fraud and Errors

Increased internal monitoring, oversight and adequate segregation of duties will often lead to the minimisation of potential fraudulent activities and other miscellaneous errors or misstatements, thereby enhancing a business’ operational standards. Diligent controls aid in the maintenance of the desired levels of internal verifications and checks whilst protecting the business from accruing significant losses.

 

4. Enhanced Regulatory Compliance

Periodic testing and internal verification of a business’ compliance with the applicable legislative frameworks aid in its overall ability to act as a going concern whilst addressing any external risks associated with such a dimension.

 

5. Enhanced Accuracy of Generated Financial Statements

Bolstered internal controls allow for reconciliations, verifications and financial testing to take place on a regular basis to adequately safeguard the business’ assets and thus provide stakeholders with the best outline of its financial standing.

 

Learn More about BDO's Risk Advisory Services

 

How can BDO help? 

BDO Malta offers a multitude of Internal Audit Solutions that aim to significantly bolster clients’ internal control frameworks and improve their holistic operational effectiveness. Get in touch with our experts for a tailored quote:

 

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