Risks That Internal Controls Help to Avoid
Internal controls are important in every organization, as they support organizations in achieving the objectives that have been set.
Internal controls are also an important component of Enterprise Risk Management. Without proper internal controls, the chance of several business risks increases:
1. Business Interruption
: internal controls help to avoid system breakdowns and errors, and therefore it helps to prevent excessive re-work to fix errors.
2. Erroneous Management Decisions
: erroneous, inadequate or misleading information may lead to erroneous management decision making. Internal controls help to prevent the presence and usage of unjust information and that helps organizations to make effective decisions.
3. Fraud, Embezzlement and Theft
: Internal controls are unfortunately needed to stop or minimize embezzlements and frauds by managers, employees, consumers, suppliers and so forth.
4. Statutory Sanctions
: In organizations with good internal controls, people are aware of the fact that they are likely to be sanctioned if they don’t comply with the rules. As such, internal controls help to prevent overt violations and the breaking of organizational rules and regulations.
5. High Costs and Insufficient Revenues
: without internal controls on expenses and revenues, organizations often end up in making unjust decisions that lead to excessive costs and reduce revenues. Therefore, internal controls are needed to keep track of the expenses and revenues of a company.
6. Loss, Misuse or Destruction of Assets
: not having established good internal controls can also be detrimental in terms of unintentionally losing assets (cash, inventory, machines) of an organization.
Source: Powerpoint by OBTB, “Managing Risks Through Internal Controls”