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The Importance of Corporate Internal Control

Nov 5, 2007
The innovative developments in financial sector have led to increased demand for an effective risk management as well as sophisticated corporate governance. Every business organization is subject to some kind of risks depending upon several factors such as the products and services it sell, the market in which it functions, the sources through which it is financed, and the way it utilizes its resources. Hence, it is important to coordinate every aspect of a business organization in an effective way. Here comes the importance of corporate internal control system. In other words, a good corporate internal control has now become an integral segment of risk management framework.

Internal control systems (ICS) or corporate internal control is simply the effective integration of activities, policies, plans, and efforts of employees working together in an organization, in order to achieve the business goals. The prime purpose of corporate internal control is to promote economical as well as efficient operations that go with the objectives of an organization.

Other prime purposes are to protect firm's resources against mismanagement or fraud, to ensure whether the company's activities are in accordance with laws and regulations, and above all, to develop consistent financial as well as managerial data in order to present them timely. In short, the activities that are covered in the implementation of a good corporate internal control are overseeing activities in connection with authorizations and reconciliations, reviewing of employee performance, security of assets, and segregation of duties.

A host of benefits can be derived through the implementation of an effective corporate internal control system. Since a good internal control system ensures that the resources are utilized only for their intended purposes, a great advantage is that it helps to overcome the risk associated with the misuse of organization's funds and other resources.

Another prime benefit is that prevents errors and irregularities by detecting them in a timely manner, thereby promoting reliable and accurate accounting records. Also, a great benefit is that it can quickly resolve issues arising as a result of reporting errors. Above all, it protects the interests of employees by clearly specifying them their duties and responsibilities and safeguarding them from against being accused of irregularities or misappropriations.

The type of corporate internal control system adopted in a business organization depends upon the varying requirements of an organization. However, the most common types that are implemented in many of the business organizations include preventive internal control, detective internal control systems, and corrective controls.

Preventive control system is designed in such a way to detect and eliminate errors and irregularities before they have occurred. In detective corporate internal control, it corrects errors and irregularities that have been detected. When comes to preventive control system, it is designed to avoid errors or irregularities from taking place in the first place.

No matter it is of any type, an effective internal control system consists of certain important steps, such as, control environment, assessment of risk, control activities, information as well as communication, and monitoring. The foundation for all others steps involved in internal control systems, control environment provides a framework for the organization by including in it elements such as integrity and ethical values.

Assessment of risk involves the analysis and establishment of plans in order to prevent the risks associated with the attainment of company's objectives. Control activities include policies and procedures formulated by management in order to ensure the effectiveness of carrying out of activities with regard to the achievement of organizational goals.

The information and communication step covers understanding of policies and procedures, validation of information, and evaluation of employee performance. Perhaps the most prominent of all steps of internal control systems is monitoring, which is the practice of assessing the overall performance of an organization.

Above all, the full benefits of internal control system could be achieved only if it is implemented in an effective way. Hence, it is evident that it could be devised only by an expert. Perhaps for this reason, now many learning centers across the globe conduct specialized courses for corporate internal control, such as, certificate in corporate internal control, covering sessions such as concepts of Internal Control, risk assessment and management, defect management, and corporate governance and corresponding standards.
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