ENSHRINING AN EFFECTIVE INTERNAL CONTROL SYSTEM 

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A corporation, big or small, would be a den of chaos, if a sound internal control system is not enshrined in the entity. A major reality of the modern day complexities of a 21st century business entity is that there are so many transactions, activities, employees, and functions that if they are not properly coordinated and monitored, the business entity would be losing more than it is gaining. A sound internal control system serves to ensure order in an entity so that business objectives are achieved while employing the right personnel and operations are managed in accordance with company policies. Management is concerned with strategic decisions, but, even a well-thought out strategy will fail, if operations are going awry. Management want assurances that the right personnel have been employed; that operations are being carried out orderly in line with company policies; that fraud has been eliminated or can be detected; that the entity is complying with regulations and laws; that authorisation is sought before any transaction; that fraud risk is mitigated or eliminated. These assurances can only be given if a sound internal control system is enshrined in an entity.

WHO IS THE AUTHORITY ON INTERNAL CONTROL?

The Committee of Sponsoring Organizations of the Treadway Commission (COSO) is the internationally recognized authority on internal control. In 1992, the COSO released its internal control – integrated framework (the original framework). It is recognized as a leading framework for designing and implementing internal control and assessing the effectiveness of internal control. 

In response to the modern day complexities of corporations, the COSO released an updated internal control – integrated framework (framework) in 2013. COSO believes the updated framework will assist organizations to develop and implement internal control that will ensure business objectives are met and be responsive to changes in the business and operating environments.

WHAT IS INTERNAL CONTROL?

According to the Committee of Sponsoring Organizations of the Treadway Commission (COSO) internal control-integrated framework, an internal control is a process, effected by an entity’s board of directors, management, and other personnel, designed to provide reasonable assurance regarding the achievement of objectives relating to operations, reporting, and compliance. It is a system established by management as a function to management to ensure orderly conduct of business operations, safeguard of assets, and to ensure a reliable financial reporting. 

The definition highlights the following:

• That internal control seeks to achieve objectives in one or more categories – operations, reporting, and compliance.

• That internal control is a process of on-going tasks and activities – it is a means to an end.

• That internal control is effected by individuals – its success depends on the actions and inactions of the individuals in an organization.

• That internal control seeks to provide reasonable assurance to the management and those charged with governance – not absolute assurance.

• That internal control is adaptable to the structure of the organization.

WHAT ARE THE OBJECTIVES OF AN INTERNAL CONTROL?

The framework identifies three objectives of an internal control as: 

i. Operations objectives: An internal control system seeks to achieve efficient and effective operations of an organization; to ensure that operations are carried out in accordance with the policy and procedures laid down by management and those charged with governance. It also seeks to ensure that assets are safeguarded.

ii. Reporting objectives: These relates to internal and external financial and non-financial reporting. Internal control ensures that the financial and non-financial reporting is reliable, timely and agrees with the applicable financial reporting framework as set by the regulators or accounting standard setters.

iii. Compliance objectives: A sound internal control seeks to ensure that organizations are complying with laws and regulations to which the organizations are subject.

Any entity that aims to achieve sustainable success needs to pay pious devotion to instituting a sound internal control system. In the next article, we will dive more into the content of the new framework and its applications.

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Written by Abayomi Samuel