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Five essential financial controls every company needs

Shanna Hall
8 Min

As the financial gatekeepers (and guardians), finance leaders know exactly how important it is to protect their organisations’ money. And effective financial controls are a critical part of that protection.

Exact controls and implementation depend on your organisation’s operations, workflows and risk profile. But there are five financial controls that, in one form or another, should form part of your defence. In this article, we’ll explore those financial controls and explain why they’re instrumental in maintaining and protecting a healthy bottom line.

What are financial controls?

By “financial controls,” we’re referring to the processes and systems put in place to manage financial transactions, such as income statement and balance sheet reconciliations, expense approvals and fraud prevention measures.

One of the primary benefits of robust financial controls is that they enable a company to maintain accurate records while preventing losses due to errors or fraud. This involves designing procedures that ensure compliance with accounting principles and internal policies, all while promoting transparency across various functions and workflows.

Ultimately, this helps build confidence among stakeholders by showcasing responsible management practices. It can also be super important for any auditing, regulatory documentation or reporting obligations.

Definition of financial controls

According to the Corporate Financial Institute, financial controls are defined as the processes and procedures put in place to manage an organisation’s financial resources. There are various types of financial controls that businesses can implement, such as internal audits, segregation of duties and procure-to-pay procedures.

Key components of financial controls include:

  • Monitoring cash flow projections
  • Analysing balance sheets and income statements
  • Reconciling accounts payable and receivable records
  • Ensuring compliance with regulatory requirements

Implementing financial controls helps businesses identify potential risks and make informed decisions about resource allocation. Aligning financial controls with a cybersecurity strategy can also mitigate the risk of cyber-crime.

They form a crucial part of visibility, too, providing leaders with more accurate data about their finances and helping them make better decisions about resource allocation or risks.

Why are financial controls necessary?

These controls are essential for businesses to achieve financial stability and success. Mitigating fraud and errors is one of the primary reasons why financial controls are important. By implementing internal control policies, companies can reduce the risk of fraudulent activities that may harm their income statement or processes.

Ensuring compliance with regulations and laws is another reason why financial controls are vital. Companies need to maintain accurate records under various regulatory bodies such as the Australian Transaction Reports and Analysis Centre (AUSTRAC) or Australian Taxation Office (ATO). Failure to comply with these regulations could result in severe legal repercussions for a business.

Lastly, improving overall business performance is an additional benefit of effective financial control implementation. By having reliable information on hand, leaders can make better-informed decisions that ultimately lead to more sustainable growth over time.

Five essential financial controls

All financial leaders need to be designing, implementing and continuously reassessing the controls that keep workflows moving and risks low. So what are the five essential financial controls that every business needs to implement?

1. Segregation of duties

Segregation of duties is one of your strongest defences against fraud and errors in financial processes. This involves assigning different tasks to separate individuals, preventing any one individual from exercising control over the entire process and dispersing accountability across multiple employees. Basically, it helps catch errors and makes it harder for malicious actors to go undetected, since you’d need a department-wide conspiracy to circumvent the control.

To effectively implement segregation of duties, consider the following:

  • Identify key financial processes and associated tasks
  • Assign duties to different individuals or departments
  • Ensure that no one person has complete control over any single process
  • Regularly reviewing and updating your segregation of duties procedures

2. Internal auditing

Internal auditing helps identify potential errors or fraudulent activities before they become major problems, along with the vulnerabilities that could expose your business to those risks. An internal auditor assesses the effectiveness of existing financial controls and recommends improvements where necessary.

Internal audits should be performed regularly to ensure that all financial records are accurate and up-to-date.

The audit process includes reviewing transactions, examining supporting documents, verifying account balances, assessing compliance with laws and regulations and identifying risks that could impact the organisation’s financial health.

By implementing a comprehensive internal audit program, businesses can enhance their overall risk management strategies and safeguard against losses or damages caused by fraud or other forms of misconduct.

3. Budgeting and forecasting

Budgeting and forecasting are critical financial controls that every business leader must implement to ensure the company’s long-term success. Without them, companies can easily overspend or fail to allocate resources effectively.

Here are some key points to keep in mind when implementing budgeting and forecasting practices:

  • Set realistic goals. When setting your forecasts, be realistic about what you can achieve given your current resources
  • Use historical data. Analyse past performance trends to create more accurate projections for future periods
  • Monitor regularly. Regularly review budgets versus actuals and adjust as necessary based on performance

Remember, the purpose of budgeting and forecasting is not just for compliance purposes but also to help leaders make informed decisions on how to allocate resources.

4. Reconciliation

A robust reconciliation process helps prevent errors, omissions and fraud while enabling prompt detection of any discrepancies that might come up. It involves comparing data from different sources such as bank statements, ledgers, invoices or receipts to identify any inconsistencies.

By reconciling accounts regularly and promptly investigating any variances identified during the process, businesses can improve other internal controls and safeguard against financial risks.

Business leaders also need periodic reviews of their reconciliation processes to ensure continuous improvement in identifying potential vulnerabilities in the system. These reviews should be conducted by independent auditors who have no direct involvement in the day-to-day operations of accounting activities within your organisation. This way, organisations can get insights into potential areas for improvement while enhancing transparency and accountability throughout all financial control implementation practices.

5. Cash management

Effective cash management is essential for any business to succeed. Here are some key strategies to consider:

  • Regularly monitoring and forecasting cash flow
  • Creating a policy for handling cash transactions, including deposits, withdrawals and reconciliations
  • Establishing protocols for petty cash disbursements and reimbursements

By implementing these financial controls, businesses can ensure that they have the necessary funds on hand when needed while minimising the risk of fraud or misappropriation of funds. Additionally, effective cash management can help businesses make informed decisions about investments or other major expenditures.

Implementing financial controls

One of the most crucial steps in implementing financial controls is identifying risks. This involves conducting a thorough assessment of your business processes to identify potential areas where fraud or errors may occur. Once you have identified these risks, you can then prioritise them and develop appropriate controls to mitigate them.

Another key aspect of implementing financial controls is designing and implementing the actual controls themselves. It’s important to ensure that these controls are tailored specifically to address the identified risks, while also being practical and feasible for employees to follow. This may involve developing policies and procedures, establishing segregation of duties or implementing technological solutions such as automated monitoring tools.

Step 1: Identify risks

Assessing potential financial risks is an essential step in implementing effective financial controls. To identify these risks, it’s necessary to evaluate the current financial processes and pinpoint areas of vulnerability. Once identified, determining the likelihood and impact of these risks can help prioritise which ones require immediate attention. By frontloading this process, businesses can proactively manage their finances and avoid costly mistakes.

Whether it’s through internal or external factors, understanding where vulnerabilities exist helps create targeted control measures that mitigate fraud risks. It also allows organisations to better allocate resources towards addressing those vulnerabilities (and with greater precision).

Determining the likelihood and impact of risks is key when creating a comprehensive control plan, since different types of risks may have varying degrees of consequences. This vital piece of information helps leaders make informed decisions about prioritising certain controls over others.

Step 2: Evaluate controls

Reviewing existing controls is a crucial step in ensuring that your financial controls are working effectively. Pressure testing, auditing and regular reevaluation can all help you determine if controls are still adequate or need improvement. You may simply need to update certain parts of a control process, or you might need a new approach altogether – regular review can help you figure out which path is best.

When you’re taking on this process, keep in mind that your controls are likely to fall into one of these categories:

  • Detective
  • Preventive
  • Corrective

You should also ensure that these control procedures are designed and implemented with consideration for the nature and scale of business operations. By carefully assessing all relevant factors during this step, you’re more likely to safeguard your organisation’s assets against fraudulent activities.

Step 3: Design and implement controls

To ensure effective financial controls, the next step is developing and implementing new control procedures and policies that address any identified gaps. This involves a thorough review of existing processes, identifying areas for improvements and rolling out new measures to mitigate potential risks. Plus, organisations will have to craft their control framework with an eye for compliance with legal requirements and industry standards.

Implementing new control measures requires a careful balancing act between effectiveness and practicality. Financial leaders need to assess the impact of any proposed changes on business operations while ensuring that controls are robust enough to prevent fraudulent activity or errors within the system. Furthermore, every decision made during this process should align with legal requirements and industry standards for financial controls.

Ensuring compliance with all applicable laws and regulations is critical in maintaining strong financial controls. Compliance includes adhering to local regulations regarding accounting principles such as GAAP (Generally Accepted Accounting Principles). Businesses need to follow these rules and stay up-to-date on recent developments to avoid any potential issues down the line.

Step 4: Monitor and review controls

Regular monitoring and review of financial controls are critical to ensure their effectiveness. This step involves tracking the performance of controls against established benchmarks, identifying weaknesses or gaps in the control system, and making necessary adjustments. Financial leaders need to allocate adequate resources for this activity as it helps them stay ahead of emerging risks and adapt quickly to changing business conditions.

It is important to involve all stakeholders in the monitoring and review process, including internal auditors, finance teams, risk management professionals and external advisors where necessary. The insights gained from regular reviews can help improve overall business performance by highlighting areas that require attention while also ensuring compliance with regulatory requirements.

Start somewhere simple: download the Segregation of Duties Checklist
Don’t want to let cyber-criminals keep the upper hand? Protect your organisation today by building a strong policy around your segregation of duties.

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