Internal Control: need for focus on future priorities

Internal control and the management agenda

Internal Control is a topic which always is on the agenda of (senior) management. It is common sense that addressing this topic effectively facilitates organizational performance and gives room to focus more on clients and value creation. However, in many cases organizing this effectively is a challenge and opportunity. This is reinforced by the current changing way how digital transformation has evolved in many industries, business models and how this has been embedded in organizational processes, risks and controls that support organizational goals.

While in the past static processes and controls were sufficient, current business and organizational environments demand a different approach and role.

What is Internal Control?

Internal Control can relate to financial and non-financial related areas. In all cases below attributes apply. Internal Control:

  • Is a structured process
  • Supports in realizing organization objectives
  • Assures reliable reporting and related compliance
  • Addresses Risks
  • Applies to every organization!

For illustration purposes, a typical example of areas in scope for internal control when focusing on financial reporting which apply to almost every organization are:

  • Sales and accounts receivable
  • Cash management and banking
  • Inventory and supply chain
  • Purchases and accounts payable
  • Payroll and human resources
  • Financial statement closing and reporting

These are dictated by systems in use, related general IT and application controls, organization structure, roles, responsibilities, processes, analytics focusing on risks/opportunities etc.

Requirement for effective internal control

A main requirement to organize Internal Control is to address below building blocks:

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When addressing above building blocks, aligning with the organizational strategy is a main driver. No value is created by implementing structures and processing related attributes when not fully linking this with strategy, management commitment and systems/automation used.

Secure alignment

To secure alignment with the organizational strategy, Internal control typically can play a key role as presented in below overview:

Plaatje 2Purpose of this governance model is not minimizing risk which would hinder business activities but an optimized risk/return.

Internal control can be the key player in the ‘second line of defense’ and can take the position to lead efficient and effective management focus on risks in realizing organization objectives with focus on reliable financial reporting and related compliance.

A recent study  in the Journal of Accounting Literature (Volume 42, June 2019, Pages 80-103) also provides broad insight in the high relevance of internal control to stakeholders including investors, creditors, managers, auditors and financial analysts. Also evidence concerning the positive association between audit committee characteristics and internal control quality, supports the call for organizing this effectively with clear focus on organizational objectives and faster changing business models.

Future focus and priorities

Focus for organizing effective internal control should be securing continuous streamlined business processes, clear link to data and their (digital) origin, integration with compliance areas to prevent duplication. This will lead to transparency and visibility.

The 3 main priorities for organizing internal control are:

  • Embed digital in organizational processes, risks and controls that support organizational goals.
  • Take the lead in aligning the frameworks to the organizational/business objectives
  • Organize a standardized approach for both financial as non-financial internal control clearly defining empowering roles.

Always with focus on supporting organizational and business goals!

Mario Cornel

Managing Consultant Risk and Compliance

Agility is not a buzzword. It was always needed.

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In times of social and economical change, agility-adaptability is the key to survival. That’s what the majority of companies realize each and every day.

Some of them in a soft manner -adapting on time-, and thus, remaining a player of this infinite game called market.

Some others in a hard way -adapting too late-, and going out of business (or in the happy scenario, being acquired by a third company)

Implementing a Digital Transformation project is a good example where a company’s agility is really tested. The whole organization needs to operate within the same frequencies. Understand what needs to change, how to change it, and move forward as one entity.

Below is an illustration of how Agility looks like in a Digital Transformation project.

Step 1: Connect all your business units

Make sure you create one voice. Having a sponsor from/to every layer of the organization assures higher percentage of uniformity in the message delivered across the organization.

Don’t forget, confusion is the last thing you want to create in times of change.

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Step 2: Build your architecture incrementally

 Time is money. But when it comes to establishing your architecture, speed can be the enemy which can destroy everything.

Hence, make sure to build good communication channels where modeling – feedback – testing will be integral part of your architectural build-up.

It may take time, especially if the company is large enough, or has complex business processes. But, its ROI is countless. It will significantly increase the possibility of building an architecture which can withstand change and scale-up.

The two constants which hardly ever change.

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Step 3: Execute the project in a Disciplined Agile Delivery approach.

Be agile on the way you incorporate agile methodologies. Allow your teams to work in Kanban, Scrum, XP, or even in Agile Modeling approach.

In the meantime, make sure you create one funnel of incoming requests where all functional and technical requirements are gathered in.

From this point onward is pretty much a known journey.

Apply what fits best for your team, in that specific moment in the project. If that is a Kanban approach for few weeks, and then a shift to Scrum, let it be. Allow the “Development Team” together with the Scrum Master decide what is best for creating a working outcome.

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Conclusion:

Agility throughout the whole delivery. Remember, agility is not a buzzword. It was always needed. Just in different amounts.

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