What are internal controls?

What are internal controls? A quick corporate governance education guide explaining the concept and why it’s essential. 

Internal controls are the backbone of any organisation’s risk management and governance framework. They help safeguard assets and ensure operational compliance and efficiency. 

Understanding this concept is essential for board members and corporate leaders to maintain organisational integrity and accountability.

Internal controls are any internal processes, policies, or procedures that help keep an organisation secure and in control of risk. This broad concept applies to diverse areas such as physical security, digital security, financial integrity, and legal compliance.

They are critical tools for achieving the governance standards that all directors, executives, and other key leaders commit to. 

In addition to mitigating risk and increasing compliance standards, they also enhance leaders’ decision-making ability and instil confidence in all stakeholders, from employees to investors. These groups consistently want reassurances that the company is acting with integrity and measured judgements; internal controls facilitate this. 

They generally fall into three broad categories:

These are designed to prevent errors or fraud before they occur. Examples include separating key duties and powers within the business, access controls to physical premises or digital systems, compliance activity and employee training.

These help identify errors or irregularities after they occur. They’re a key tool in ensuring the same mistake doesn’t happen twice. Examples include internal/external inquiries following serious events and stakeholder feedback sessions.

These aim to address and rectify issues uncovered by detective controls. Examples include updating policies and procedures and adequate training for staff and leaders.

Board members are pivotal in overseeing internal controls as part of their governance responsibilities. In many instances, they are part of those controls, especially when you consider that one of a director’s main jobs is to analyse tactics and ask the right questions. 

To play an active role in internal controls, board members should familiarise themselves with the business’ policies, monitor and review their implementation – using board meetings and other key opportunities to ask questions – and engage with whoever is necessary if they see a problem.

Internal controls are indispensable for effective corporate governance. They protect assets, ensure accurate reporting, and promote transparency, which are all vital for stakeholder confidence and organisational success. For board members, understanding and actively overseeing this concept is crucial in fostering a culture of accountability and trust.