Internal Control is the heartbeat of any organization. Internal Control ensures healthy environment for entity's growth. Internal Controls are the lifelines of the business, absence of these will slowly bring the entire business to a grinding halt.
As defined by SIA(Standards on Internal Audit) 12-Internal Control system means all the policies and procedures (IC) adopted by the management of an entity to assist in achieving management's objective of ensuring as far as practicable, the orderly and efficient conduct of its business including adherence to management policies ,the safeguarding of assets, the prevention and detection of fraud and error, the accuracy and completeness of accounting records and the timely preparation of reliable financial information.
As cement binds two bricks in a structure, similarly Internal Control binds the organization as a whole ensuring stability ,sustainability and growth.
Some of the challenges affecting effectiveness of Internal Controls are listed below:
1.Absence of Standard Operating Procedures (SOP )-One of the common issue observed is absence of a documented SOP, resulting in loose/weak controls as there is no authenticated document fixing the responsibility. SOP should clearly describe the procedure, documents forming part of a process,fixing of responsibility with date of effectiveness and approval of the authorized personnel.
2.Non-updation of changes in SOP-Many a times,changes in the process is not updated in SOP,resulting in ambiguity and higher probability of non-communication/miscommunication about the changes to the concerned stakeholders.This would hamper the operations and pose financial risk too.SOP is the mother document which needs to be upto date and circulated in a time to concerned stakeholders.
3.SOP is unclear-SOP sometimes is very ambiguous and lacks clarity.It has to be very clear,concise,crisp and devoid of doubts.
4. Absence of Fixation of Ownership/Onus-Fixing of ownership on every asset of a company is a very critical aspect .It fixes the processes which would otherwise get loosened due to irregularities .For instance, in one particular case, the company purchased a new software for management of its Fixed Assets. Due to non-integration of the FA software with books ,variances in FA were observed. Further it was found that FA software was not updated as ownership on the FA software was not affixed. Blame game between departments only resulted in wastage of financial resources ,and thus weakening of Controls .
Internal Controls also ensure effective Corporate Governance .Ineffective Controls led to the fall of the 144 year old empire of Toshiba .Toshiba's corporate culture of obedience to senior employees is one of the main reason for its collapse. Excessive pressure from Top Management to meet unrealistic targets which employees had no choice( Toshiba's corporate culture) but to blindly abide by, got engulfed by a scandal.Corporate governance today has a very pivotal role in ensuring smooth and effective running of business.
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