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The five essential elements of internal controls within accounting teams

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Accounting departments need to implement the five essential elements of internal controls within their teams. Like it or not, organizations hold their accounting departments to higher standards when it comes to internal controls. Although accounting departments do not have a monopoly on internal controls, the state of internal controls in the accounting department is often a barometer for controls in the entire organization.

The accounting department is in fact uniquely placed to ensure or exert influence to ensure that internal controls are pervasive throughout the entity. It is the collator, preparer and reporter of financial information based on the results and activities of all other business units. It is also uniquely involved in the annual external audit, which puts the underlying financial information and processes from all business units under a microscope.

Remember that internal controls are simply the processes put in place by management to provide reasonable assurances that the organization will achieve its objectives. Internal control is more than a procedure or policy that is performed at a certain point in time, but is instead pervasive, embedded in the culture and continually operating at all levels within an organization. To be effective, and to set a good example for others, accounting departments must implement all five essential elements of internal controls described below:

  1. The control environment, which includes the integrity, culture, ethical values and competence of the accounting team-members individually and collectively, forms a critical foundation. For instance, the ethical and professional tone modelled by the department head and the existence of the required roles filled by appropriately skilled personnel, are important.  
  2. Risk assessment, which identifies and manages risk, or the possibility that an event will adversely affect the ability to achieve objectives, means that the accounting department must set its own objectives, which support organizational objectives. For an accounting department this may involve having targets for professional development hours and training for team-members, deadlines to close the month-end and provide timely reporting, and concrete steps to assess the risk of fraud and error.  
  3. Control activities are the steps which the accounting department takes to ensure that the organization can meet its objectives. These steps may eliminate or significantly reduce fraud and error, and ensure that management directives are carried out. For this element of internal controls, accounting supervisors/managers must review and approve transactions, reconciliations and other documents. For instance, the signing and dating of financial reports, reconciliations and journal entries evidencing review and approval, provide some assurances that controls exist and are functioning.
  4. Information and communication are those aspects of the accounting function which identify, capture and communicate information to others in the organization so that they too can meet their objectives. Accounting departments must provide management and financial reports to department heads to assist leaders with accountability for their cost centres. Using these reports, leaders can evaluate their actual results in both dollars and statistics like sales volume and take corrective action to achieve objectives where these are imperilled.

    Furthermore, it is not enough to merely provide reports to leaders. There should be a feedback loop for them to communicate information which the accounting department can use in variance analysis, forecasting and other senior management, board and external reporting. Ideally, the accounting department should also have a formal process to solicit leaders’ feedback about the usefulness of the information which the accounting department distributes.
  5. Monitoring refers both to the routine, ongoing management and supervisory activities, as well as any periodic separate evaluations which are carried out to assess the effectiveness of internal controls. Monitoring is essential and often neglected; many accounting departments implement internal controls and never step back to asses which, if any, are effective and cost-effective. An example of ongoing monitoring is the reviewing of unusual reconciling entries, investigating whether the reconciling entries indicate any breakdowns in internal controls, and implementing corrective procedures to prevent recurrences.

In summary, accounting departments have numerous mechanisms to incorporate all five essential elements of effective internal controls in their activities. They can create the right culture and ethical tones; hire and train qualified staff; use reconciliations, supervision and review to ensure that controls operate effectively; and create written policies and procedures implementing segregation of duties and other principles, to prevent and detect fraud and error.

Policies and procedures are essential to monitoring internal controls, but the work required to create and maintain them can seem daunting. Finance and Accounting PolicyPro, co-marketed with First Reference and Chartered Professional Accountants Canada (CPA Canada) contain sample policies, procedures and other documents, plus authoritative commentary in the area of finance and accounting, to save you time and effort in establishing and updating your internal controls and policies. Not a subscriber? Request a free 30–day trial of Finance and Accounting PolicyPro here.

Key words: Internal controls, Internal Control Monitoring, Elements of internal controls, reconciliations, reviews, supervision, separate and ongoing evaluations, Apolone Gentles

Apolone Gentles, JD, CPA,CGA, FCCA, Bsc (Hons)

Apolone Gentles is a CPA,CGA and Ontario lawyer and editor with over 20 years of business experience. Apolone is leveraging 20 years of business and accounting experience to build a commercial litigation practice with an emphasis on construction law. She has held senior leadership roles in non-profit organizations, leading finance, human resources, information technology and facilities teams. She has also held senior roles in audit and assurance services at a “Big Four” audit firm. Apolone has also lectured in Auditing, Economics and Business at post-secondary schools. Read more here

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