For decades back-office operations have been viewed as a pure cost center. CFOs and Controllers have traditionally been under tremendous pressure to reduce overhead wherever they can. This is in contrast to the increasing demand for a more robust internal control environment, which historically has required more resources.
Traditionally, implementing control activities was centered around the addition of staff, as separation of duties is a core component of the overall environment. However, a closer examination of the three types of internal controls reveals ample opportunity to automate key processes. By automating internal controls, you can strengthen their effectiveness, thereby strengthening the overall control environment.
What is Internal Control?
An internal control is a policy or procedure that creates safeguards within an organization. These policies and procedures are designed specifically to prevent things from happening that might impact the assets of a business. It is a means to reduce risk and avoid loss that might occur due to negligence or fraud.
Understanding the Three Main Types of Internal Controls
There are three primary internal controls that all organizations should be designing their control activities around. These three primary controls act as the foundation for all control activities being performed within the control environment. They are detective, preventative, and corrective.
Detective internal controls are exactly how they sound. They are designed to detect activity that caused an error or an adverse event to occur. Examples would be internal audits, independent review of work prepared, financial reporting, and inventory assessments.
Preventative controls are on the opposite end of the spectrum in that they attempt to prevent an adverse action before it happens. Examples would be automated backups of server files, anti-virus software, and separation of duties.
Finally, corrective internal controls are controls that are created in response to defective areas in the environment discovered by detective controls. An example would be implementing an independent review of all wire information after it was discovered a wire was sent to an incorrect address.
How Automation Strengthens Internal Controls
By understanding these three types of internal controls it becomes much easier to understand exactly how automation can help strengthen the internal control environment.
1. Reduces Turnover Risk in the Control Environment
As employees cycle into and eventually out of an organization the control environment gets stressed. This is because employees historically have carried out the processes that make up the control activities. As they learn their roles, they acquire certain knowledge that can only be attained through experience. When a key employee leaves, the control environment overall is weakened.
A key employee’s experience may never be fully replaced. However, by automating control activities you can mitigate the risk that arises with employee turnover because the automation software will always be with the organization.
2. Corrective Internal Controls Remain Effective
One aspect that makes corrective internal controls difficult to maintain is that they are often forgotten. This is because they are in response to one-off events that might not occur regularly. Over time, as employees cycle, as processes change, or as software changes occur the corrective control can potentially fall by the wayside.
By utilizing automation tools to implement correct internal controls, they are always in place. Once a procedure or policy is automated, there is no way for it to be forgotten or not performed. Employees who might have once used the time to review the corrective controls can now shift their focus to reviewing the automated processes for accuracy. This creates two layers of review, one in the automated process itself and one by human interaction.
The overall net effect is two additional control activities with zero new staff. It provides an enormous return to organizations concerned with strengthening their internal control environment.
3. Strengthens Disaster Recovery Procedures
When we think of internal controls, we often think of financial statement accuracy or fraud prevention. But one key aspect of the internal control environment is disaster prevention and recovery.
One example of this would be regular server backups. If a server goes down due to environmental problems or a malicious attack an organization can always use the prior days backup to move forward. This is especially helpful in today’s environment where firms operate globally across multiple sites. Automated server backups can pay dividends.
4. Allows for Robust File Management
Automation tools can be used to create copies of files at determined intervals which internal audit teams can maintain independently of the workforce. This allows for more systematic and randomized review of files to detect and deter fraud from occurring.
In the same vein, automation can be used to lock files after a month-end close occurs. It can be used to automate journal entries during the close procedure and can even be used to weed out duplicate entries in a GL. All these processes strengthen the internal control environment by detecting and preventing potential material misstatement.
5. Creates Better Preventative Controls
Preventative controls are not always complex, but they can be often forgotten by staff due to their intrusiveness. For example, left on their own, employees might not cycle their passwords regularly. This is a simple preventative control that can be automated, forcing employees to regularly create new passwords.
In the same way password cycling can be automated, so can authentication on mobile devices. Ensuring material non-public information does not get shared should be a major concern of any compliance department. Automated rules can be placed on emails sent from mobile devices that can detect when information goes to a third party.
Learn How DataRails Can Help Your Finance Team Streamline its Operations
DataRails can help your company implement automation to strengthen your internal control environment and provide your employees with the tools they need to become as productive as possible. Automation is easily one of the most important tools available to modern finance departments and is critical to maintaining a lean department that is still in compliance with all rules and regulations of your industry.