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The Importance of Internal Controls in Organizations

Fraud is familiar to organizations large and small. Undetected, it grows quickly in confidence and in size. It is like leaving the cookie jar open and never asking “Who stole the cookies from the cookie jar?” The cookies start disappearing at a faster rate. Business leaders and management need to be vigilant. Internal controls must be in place at all times. Publilius Syrus, the Roman writer famously said, “He is most free from danger, who, even when safe, is on his guard”.

The danger to organizations is not from fraud alone. Inaccurate financial reporting can lead to costly errors in decision making, or inefficiencies in operations. Worse, a lack of internal controls can lead to a serious breach of law and compliance issues. The harm done to the financial health, vitality and reputation of the organization is not easy to repair.

To succeed in an ever-changing environment, it is imperative for companies to gain and sustain its competitive advantage and one of the ways in which competitive advantage can be gained and sustained is through the effectiveness of its Internal Control framework which includes primary (such as Sales, Marketing, Distribution, Procurement etc.) & supporting department /functions (such as accounting and finance, HR, Administration etc.).

A good Internal Control framework of a company can raise the business performance of a company through good accounting practices, a strong and effective internal control function, judicious allocation of capital and resources, working capital management, effective systems and processes, focus on cost containment and cost reduction, account receivables, inventory etc.

To ensure robust internal controls, top management must demonstrate its commitment to the system. The ‘top sets the tone’ when it comes to reiterating the importance of ethical business practices down the hierarchy. A good accounting system and accurate financial reporting are mandatory as the world looks for compliance and good governance. No detail is too small. Regular training of employees, guidelines documenting and detailing the policies of the organization, SOPs detailing correct procedures and constant employee communication on expected behaviors help build good internal controls. The message should be clear. Zero tolerance of deviant behavior.

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