Impact of Internal Control Systems on an Organizational Performance

Impact of Internal Control Systems on an Organizational Performance

Introduction

The management in various organizations is obliged to provide necessary controls, particularly in their internal system. The implementation of such internal control and policy are applied to secure the revenues and have a proper allocation on the expenses and resources. Having the internal control in the management will sure create a great change among the structure of operation in the business.

Internal Control

The internal control system or ICS is supported in two basic parts which are procedures and controls. The procedures can establish the necessary performance of the organizations through the operation meanwhile; the controls are applied to ensure the conducted procedures of the business. The ICS allows the management to determine the measurement of the conditions or characteristics that can damage the entire organizations and turn into the improvements and cost-effectiveness (Brewer and List, 2004). There are changes that might drive the organization change its process, objectives, and others, for over the time. The internal control is an ongoing process and can help the entire organization to analyze its goals and objectives. Determining the risks is another scope of the control that can be describe as the detective and preventive controls (Brewer and List, 2004; Benison, 2007). Taking the idea of changes and the detective/ preventive actions, it only emphasizes that the management should place a monitoring action on the controls of the activities. Basically, monitoring helps the entire organization to ensure the effectiveness of the ICS as well as the effectiveness and efficiency of the policies, procedures and the responsibilities (Benison, 2007). Organizations should create a consistent philosophy regarding the establishment of the sound internal control system to help the organization in improving the overall business efficiency, communication and cooperation, and managing the basic policies (Nabtesco, 2006).

Effectiveness of Internal Control

The effectiveness should be also according with the efficiency and both are the fundamental management responsibilities. Effectiveness is judged on the basis of the results on the implementation of ICS. In an organization, the success of ICS as well as recognizing its effectiveness is based on meeting its objectives. The most effective representation of the control is done through recording. The manager has a responsibility to ensure that there is an internal control and therefore, emphasizing their function in monitoring the sales and the performance of the people. This gives rise to the relation of internal control in detecting or preventing the misstatements or errors in the records thus, allowing the controls to be consistent to avoid the discrepancies in the values (CPA, 2002).

The Effect of Internal Control on Management and Performance

Through testing the effectiveness of the controls and assessing the risks, the strategy in increasing sales can be achieved. By the use of appropriate procedures of inquiry, documentation, observation, and re-performance, the manager can understand how well the internal control is implemented. All the gathered information, the auditor (who is usually different from the manager) can observe if the financial statement is auditable as well as determining the risk that might involve in the system and how it can be controlled. It is true that there is a need for control system, not only for assessing the risks and creating an action or response but also for the security of the entire organization. The ICS is best applied with the guidance of the objectives which is to have a clear communication on the duties and responsibilities of the people, have a system that is appropriate on the activities, and to recognize the critical points in every activity and ensuring it. The assurance of the effectiveness of the internal control is based on the continuous monitoring whether the system in adequately designed properly, executed and effective in the certain activity. In the continuous process of internal control, the management can realize a more systematic way in handling the activities that involves the cash or budget handling.

Conclusion

The internal control should be performed by a person who has the knowledge in internal control operation or having the background in accountancy. All the knowledge and skills of the individual will reflect on the recording processes or financial statements of the company. The firm should be aware that the presence of errors and inconsistency in reporting can be a sign that there is a fraudulent action within the procedures. Also, the manager must maintain the communication to ensure that the process in the management is being followed. The internal controls can significantly return the core advantages in the business such as stability and improvement in the accountability.

References:

Benison, M., (2007) Internal Control Guide, Office of the Comptroller, Quality Assurance Bureau [Online] Available at: http://www.mass.gov/Aosc/docs/business_functions/bf_int_cntrls/Internal_Control_Guide_Volume_I.pdf [Accessed 03 March 2011]

Brewer, D., & List, W., (2004) Measuring the Effectiveness of an Internal Control System, Gamma Secure Systems Limited, Wm.List & Co. [Online] Available at: http://www.gammassl.co.uk/topics/time/time040317.pdf [Accessed 03 March 2011].

CPA, (2002) Assessing the Effectiveness of Internal Control over Financial Reporting in Accordance With Section 404 of the Sarbanes-Oxley Act of 2002, Certified Public Accountants, McGladrey & Pullen [Online] Available at: http://www.mcgladrey.com/Resource_Center/Articles/SarbanesOxleyActInternalControl.pdf [Accessed 03 March 2011]

Nabtesco, (2006) CSR Activities Corporate Governance, Annual Report [Online] Available at: http://www.nabtesco.com/ir/pdf/2006_3/AR/annual_report_2006_005.pdf [Accessed 03 March 2011].

 

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