Internal Controls are the processes and strategies which a company or an organization uses to ensure that its operations are effective and efficient. Without internal controls, a business operates inefficiently, in an unreliable manner and out of compliance with applicable laws and regulations. Effective internal controls reduce the risk of loss and help ensure that financial statements are reliable. Therefore, organizations should protect themselves from possible threats by monitoring their internal control systems often and adjusting them to become stronger.
Internal controls intended to ensure the efficiency and effectiveness of company operations can include processes designed to minimize waste and downtime. For instance, if these controls break down, the company operations can become inefficient. Internal controls are also intended to ensure regulatory and legal compliance can be the most important for a company, as a violation of laws or regulations can result in large fines, lawsuits or even criminal charges which can lead to affect the reputations of the company.
The American Institute of Accountants first defined the concept of internal controls in 1949. Internal controls ensure that authorized transactions get executed, recorded, accessed and analyzed. When a company operates without an effective system of internal controls, employees complete job tasks in an environment without the assurance of personal safety. This leads to high rates of employee dissatisfaction and low rates of employee retention. Employers then spend unnecessary time and effort recruiting, interviewing, hiring and training new employees on a regular basis. The integrity of financial records and managerial reports tends to be questioned by business partners and stakeholders, such as investors. The company’s reputation suffers when it experiences non-compliance with laws, regulations and other requirements and may even lead to legal action.
Lack of internal controls typically results in the lack of ability to track performance against budgets, forecasts and schedules. Additionally, lack of attention to information security leads to privacy concerns. Unauthorized access to financial data and customer records, including sensitive information, results in security breaches and compromised accounts. Illegal transactions include theft or misappropriation of assets by employees, which may include the falsification of records.