Why are Internal Controls Critical for your Company?

Vector image of an Executive Encrypting Sensitive Data through Internal Controls
Reasons why internal controls are integral for your company

Any organization, be it a startup or a multinational corporation, does not want to get strung between lawsuits, compliance risks, or any other dispute that may negatively impact its time, resources, and reputation. This is why many organizations have stringent internal controls in place to prevent any such incident from taking place. To comprehensively understand the effect of internal controls, we'll have to start from scratch to uncover its meaning, benefits, and execution.

What Does Internal Control Mean?

Internal controls are the processes/measures that a company employs to manage risk and prevent fraud. The control environment, accounting system, and procedures known as control activities make up the internal control structure.

The management team of a corporation must carefully develop an internal control system that tackles the organization's risks while avoiding excessive expenses and effort. Therefore, your organization's internal controls should be effective, efficient, and tailored to your specific circumstances.

Benefits Of Internal Controls

Internal controls assist your staff in carrying out their duties to protect your company, its clients, and its bottom line. Management, IT security, finance, accounting, and operational teams employ internal controls across their systems and processes. For the purpose of this blog, we will be focussing on infosec-related internal controls. By establishing the right structures, a company can achieve the following objectives:

Establishes accountability

Internal controls guarantee that your information security reporting reflects correct, up-to-date, and complete information. This propels the team to address any uncertainties and establish accountability for tasks.

Separation of duties

Well-designed internal controls can ensure that an organization's roles are adequately separated and that a system of checks and balances is in place.

Ensure compliance

Internal controls assist a company in complying with federal and state legislation, such as GDPR and CCPA, industry-specific requirements such as PCI-DSS and HIPAA, and voluntary information security standards like SOC 2 or ISO 27001.

Increase the security of data and assets

Since most data and assets are digitally produced and kept in the post-pandemic world, losing it all usually takes a small error. Internal controls safeguard a company's tangible and intangible assets, providing increased assurance that they won't be tampered with.

Produces timely maintained records

Some controls work in providing Internal and external stakeholders with accurate and timely infosec-related updates, which further assist them in making choices and effectively planning for the future.

Correlation between Internal Controls and Data Security

Internal controls integrated into your information security procedures are critical to ensure that you have effective systems in place, especially regarding data security. It is essential to assess how your security compliance program is doing. For instance, when there is a cybersecurity issue, regulators assessing your controls will determine if your company is actually making a meaningful attempt to comply or merely going through the motions.

COSO, or the Committee of Sponsoring Organizations of the Treadway Commission, presents five categories of internal controls to assist organizations in developing their own distinctive and effective internal controls. These five categories are as follows;

Five Kinds Of Internal Controls

1. Control Environment:

The processes and structure that are necessary to carry out the internal control within your organization is included within the control environment. It includes the basis or framework of the entire internal control program. There are three elements in a controlled environment;

  1. Ethical values of the organization

  2. Criteria governing how and when the board will carry out its obligations

  3. Incentives or rewards

In simpler terms, the control environment is the culture that your organization cultivates around internal controls. Executives and company leaders must all explain the necessity of internal controls downward, and all processes must take place inside the control environment's constraints.

2. Risk Assessment:

To create effective internal controls, a company must first identify what risks it is accounting for and what internal and external threats it faces. A good risk assessment entails identifying hazards in all aspects of your business, both inside and outside your organization, and then determining solutions to mitigate or reduce those risks to an acceptable level.

To carry out these risk management activities, you must set certain control activities or measures in place. These actions are implemented throughout your organization to detect, monitor, and, eventually, prevent hazards from developing.

3. Information and Communication:

In many respects, communication is the most crucial aspect when it comes to internal controls. What is the use of having internal control if the gap is not timely conveyed to the management? Internal controls must be communicated openly, as comprehensive reporting and collecting information are critical to the entire process.

4. Monitoring:

To evaluate the efficacy of your internal controls and ensure that any loopholes in the controls you've built are addressed, you must regularly monitor your controls and run tests to confirm that your procedures are operating as intended.

5. Performing an Internal Audit:

Conducting an internal audit will test the performance of the internal controls you have implemented. If your firm has been monitoring internal controls and providing frequent and detailed reports, as well as combining all of that information in one place, producing the report should be reasonably straightforward.

Minimizing Security Risk With Internal Controls

Internal controls act as security safeguards as they detect, monitor, and assess potential risks to which an organization may be exposed. These security controls can be either physical, procedural, technical, or legal. You can differentiate between these controls by understanding their nature, purpose of implementation, and impact.

However, each organization can tailor the internal controls in order to minimize risks. To do that, you will need to ensure that the controls you have in place are effective.

Identify your risks: Before taking action to safeguard your assets, you must first understand what you're safeguarding them from and how to do it efficiently. An information security risk assessment will provide you with a complete analysis of your risks and will aid you in determining how to reduce them.

Consider both physical and digital threats: Security goes beyond who has electronic access to data or email regulations. Many employees have access to locations where assets are kept. Therefore your company requires rules and procedures to safeguard physical assets and technological threats.

Work on your compliance processes: You will get the chance to find weaknesses in your security program by going through a full compliance check.

Response to a breach: You won't be able to totally eliminate the potential of a data breach, even if you've put robust security measures in place and provided personnel with regular security training. Planning ahead and doing frequent tests are the best ways to respond appropriately to a data incident. You may be sure you won't overlook crucial steps when a crisis arises by creating a tried-and-true strategy before an occurrence.

Final Word

Therefore, we can conclude after careful consideration that internal control systems are integral for all entities, no matter their size. A successful internal control system not only allows a company to keep track of its personnel but also aids in the protection of critical client information.

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