An organization’s comprehensive financial controls and compliance framework is one of the most critical pieces of the financial close, and the effectiveness depends entirely on the organization, its tools, and its implemented processes. It should provide the Office of Finance with reliability, financial compliance, clear visibility, detailed insight into the financial close process, and evolve alongside the organization. However, organizations that fail to address or set up comprehensive controls are in jeopardy of accidental compliance violations that may significantly impede the financial and reputational success of the overall business.
“Over 90% of participants believe they have established governance frameworks to manage risk, but less than a quarter are truly confident that key controls are operating effectively.” – PwC Survey
Every Organization’s Financial Controls Falls into One of Three Categories:
Financial controls are designed but not effective. Always one step behind and often managed in various spreadsheets, and documents, resulting in:
- Little Standardization
- No Automation
- Increased risk for compliance violations and revenue loss
Financial controls are designed and adequately documented, and there is a drive towards standardization and automation, providing:
- Documented controls
- No link to other close activities
Financial controls are integrated, standardized, and monitored continuously in real-time across the organization as part of a more comprehensive framework, which is:
- Automated and standardized across the company
- Part of a holistic internal framework
- Top-down approach
- Owned by the business
“In companies who had to restate their financials, 80% thought their controls were effective before finding they were deficient after the event.” – Public Company Accounting Oversight Board (PCAOB) Survey
Managing Internal Controls to Reduce Risk
Internal controls create a safety net that mitigates risk. If your organization’s current risk management framework hasn’t reached a world-class level, you can take steps to improve your processes. Once an organization’s financial controls framework has been defined based on the criteria above, finance and accounting professionals can set objectives and implement solutions to move towards world-class controls.
It’s important to remember that the scope of an internal framework reaches beyond mere financial controls; it’s intended to promote operational accuracy and efficiency, ensure compliance with internal policies and legal requirements, and fulfill the business’s moral obligation to its employees, customers, and stakeholders.
In general, you can categorize an effective framework into three major types of internal control: preventive, detective, and corrective.
Preventive Internal Controls
Preventive types of internal control are meant to keep errors from occurring in the first place. Such as checks and balances to ensure accurate reporting.
Standard preventive controls in Finance and Accounting include separating duties over everyday tasks like performing and authorizing transactions or preparing, reviewing, and approving reconciliations.
Detective Internal Controls
Detective types of internal control are meant to discover errors after they have occurred but before they have lingered long enough to become a significant problem.
Most internal controls for the Office of Finance fall into this category, such as internal audits that provide reports and insights into compliance, catching any gaps or flaws before any external audit, as well as financial reporting and reconciliations that identify errors and offer data on an organization’s overall financial health.
Corrective Internal Controls
Corrective types of internal control are meant to prevent the recurrence of errors previously identified by detective controls to improve the processes causing risk to the organization.
These are essential internal controls for the Office of Finance. If repeated errors go unaddressed month after month, finance and accounting professionals are constantly firefighting instead of delivering the valuable business insights expected of them today. Solutions like financial close automation software can streamline manual processes for improved speed and accuracy and give the Office of Finance the time and resources needed to identify error patterns.
“While most companies have made strides to standardize their controls, over 50% state that their cost of compliance is still increasing, and over 70% still feel that the burden of compliance is set to increase over time.” – Financial Executives Research Foundation (FERF) Survey
Growing inflation, rising interest rates, and the risk of recession combined with the ongoing challenges around integrating ESG and other regulatory changes continue to put a massive strain on the Office of Finance. To shift from reactive to world-class, finance leaders must invest in solutions to streamline and improve their financial controls and risk frameworks.