Internal Control: How to Upgrade It, and Who is Responsible for It

Internal Control: How to Upgrade It, and Who is Responsible for It

Money impacts everything in a business. From what you produce to how much you produce, from how you assess risk to how you grow, your revenue and cash flow dictates how, when and where it happens. That means good internal accounting controls are essential to running your business successfully. And developing those good internal controls involves more people than you might realize.

COSO’s role

In 2013, The Committee of Sponsoring Organizations of the Treadway Commission (COSO) completed an update of its 1992 framework on internal control audits. As a result of the update, COSO now recommends companies use 17 points of focus, outlined in the update, to build upon what they were already doing. The 17 points are intended as a checklist and can be viewed as a PDF at http://www.coso.org/documents/coso%20mcnallytransition%20article-final%20coso%20

version%20proof_5-31-13.pdf

But even with the update, COSO’s framework remains based on five key areas.

• Control environment

Ensure that management and the board of directors have created an environment of accounting and operational integrity.

GOOD ACCOUNTING, OPERATIONAL AND RISK ASSESSMENT PRACTICES ARE EVERYONE’S RESPONSIBILITY.

Risk assessment

– Does the company have sufficient clarity to assess risk factors and exposures?

• Control activities

– Is management exercising proper oversight to ensure standards are maintained?

• Information and communication

– Everyone must be talking to each other on internal accounting oversight matters.

• Ongoing monitoring

– Is the organization conducting ongoing evaluations to assess deficiencies in processes and communication among people and departments?

What does it mean for me?

If you’re running a small or mid-sized manufacturing company, it’s critical that you have strong internal accounting controls in place. Chances are good you want to focus your efforts on growing your business, not spending all of your time tinkering under the hood with internal matters. Strong internal controls will help you attain the peace of mind of knowing that your machine is running smoothly so you can focus on new business.

Here are a few things to remember.

• Everything rolls up to your accounting department.

Because everything has a cost, everything eventually finds its way through your accounting department. As a result, tracking things for accounting purposes is vital. Even operational efficiency, which would seem to have no direct connection to accounting, has monetary value. If your machines are generating 85 percent product and 15 percent waste, is there a way to get that waste percentage down? Keep track of how efficiently your people and machines make your products, because it all affects the bottom line. The more you keep track of, the better your internal control will be.

• Everybody owns internal control. 

Too often,internal control gets typecast as a “bean counter” thing, relegated to the CFOs, accountants and tax people. But because everything has a cost, the company benefits if you bring everyone into the loop and familiarize them with the COSO framework. It is up to the board of directors, CEO and CFO to loop everyone in and help them understand how their department’s practices play a role in maintaining strong internal control. Good accounting, operational and risk assessment practices are everyone’s responsibility.

• Know the role of IT. 

Companies often overlook the role of IT. Advancements in software and machinery can give you a new set of windows through which to view your company’s performance. Machines on the production floor can self-collect critical performance data and feed it into your company’s computer network, where it can be sorted and analyzed. While new IT is an upfront investment, it can pay you back many times over in the form of better oversight and efficiency.

Internal control encompasses everything in a company, and if it can be recorded, tabulated, sorted and tracked, it’s worth doing so. The work you put in now to upgrade your processes and control will serve your business well into the future.