The Importance of Internal Controls

Internal controls are like these simple security measures, but for your business finances. They help prevent fraud, detect mistakes, and ensure everything runs smoothly.

Many business owners assume that fraud or financial mismanagement won’t happen to them. But even well-run companies can experience errors, theft, or inefficiencies if proper controls aren’t in place. That’s why strong internal controls are essential—not just for preventing fraud but for creating a well-organized and financially sound company.

Think of internal controls like the guardrails on a winding road. They don’t drive the car for you, but they keep you from veering off course. They’re the policies and procedures that help businesses:

• Protect their assets (cash, equipment, data, etc.).
• Ensure financial reports are accurate.
• Prevent errors and fraud before they become costly.
• Stay compliant with regulations.

Internal controls aren’t just for large corporations—they’re essential for businesses, nonprofits and organizations of all sizes. Even a small accounting mistake or an overlooked financial discrepancy can cause significant problems down the road.

Fraud can be subtle. It often starts small—like a vendor inflating invoice prices or sending a duplicate invoice. Over time, these small leaks can turn into significant financial losses. Without proper oversight, fraud can go undetected for years.

Internal controls act as a built-in security system, making it harder for fraud to occur. Internal controls create checks and balances that help ensure financial accuracy and accountability. For example, requiring two approvals for payments over a certain amount can prevent unauthorized transactions. Regular account reconciliations by a person independent of the day-to-day bookkeeping or check-signing activity can catch discrepancies before they become serious issues.

Beyond fraud, internal controls also reduce costly errors. A simple miscalculation or data entry mistake can lead to inaccurate financial statements, missed tax deductions, or compliance issues. With the proper controls in place, these mistakes can be caught early.

Internal controls help protect your organization from scams by ensuring that sensitive information and financial transactions have the proper oversight. This might mean requiring two authorizations for large payments, preventing a single individual from making unauthorized transfers. It could also look like restricting access to Social Security numbers and personnel data, reducing the risk of identity theft and data breaches. Even something as simple as verifying vendor payment changes before processing them can prevent fraudulent invoices or phishing scams. These safeguards act as critical checkpoints, making it significantly harder for fraud to slip through unnoticed.

So the next time your “CEO” urgently needs iTunes gift card codes, or a vendor emails requesting an immediate wire transfer to a new account, internal controls can stop the scam before it costs your business thousands. Fraudsters often exploit urgency and trust, preying on businesses without proper safeguards.

Building strong internal controls doesn’t have to be overwhelming. Start with these simple steps:

1. Maintain adequate policies and procedures—Establish appropriate policies and procedures to document and implement internal controls effectively. Communicate the responsibility and accountability of employees to execute these procedures and maintain internal controls.
2. Separate Responsibilities—The person who processes payments should not be the same person who approves them. Dividing financial duties reduces the risk of fraud or error.
3. Implement Regular Reviews—Reconcile and routinely review accounts to monitor financial activity on a regular basis. Consider comparing actual to budgeted and/or prior year revenue and expenses to help catch inconsistencies before they become bigger problems.
4. Use Secure Accounting Systems—Digital tools with built-in security features help protect sensitive data.
5. Train Your Team—Employees should be aware of fraud risks, understand why internal controls matter, and know what actions they should take to help protect the business and themselves.

Like any security system, internal controls need regular updates. Business operations change, technology evolves, and new risk emerges. Regularly reviewing your financial safeguards ensures your company stays protected.

Employees should be aware of fraud risks and understand the purpose and importance of internal controls, as well as their role and responsibility in preventing fraud—both for the business and for themselves. At times, these safeguards may feel like just another step in the process, but they exist to prevent costly mistakes and protect everyone involved. A missed approval or a rushed transaction could lead to a financial loss that impacts the entire company. Employees who see internal controls as a safety net rather than a chore become active participants in keeping the business secure and running smoothly.

At Froehling Anderson, we help businesses build strong, effective internal controls that protect their financial health. If you’re unsure whether your current systems are doing enough, let’s talk. A slight adjustment today can prevent a big financial headache tomorrow.