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Financial Controls

What Are Financial Controls?

Financial controls refer to the policies and procedures a business puts in place to assure the accuracy and completeness of financial results. Financial controls span the organization, including multiple functional areas and geographies within a business.

All businesses need to ensure the completeness and accuracy of their financial results. In doing so, organizations can properly report on their finances and effectively and efficiently manage business operations, including budgeting, forecasting, and cash flow activities. Financial controls are an important activity that contributes to a business's overall health and success.

An example of a financial control includes routinely reconciling account balances, often monthly, to ensure accuracy before reporting for the month, quarter, and/or year. This activity helps finance and accounting teams ensure balances accurately reflect business operations, such as collecting cash from customers or paying bills to vendors. A lack of control can lead to missed payments, fraught relationships, and more serious financial strain on an organization.

Financial controls can be performed manually or automatically and on an ad hoc or recurring basis. Effective management of financial controls can help an organization maximize efficiency, support growth, and improve accuracy.

Types of Financial Controls

Organizations can implement various control types to limit, detect, and/or correct breakdowns and their resulting impacts. A combination of these control types can help an organization drive greater assurance and effectiveness of its control environment.

1. Preventative Controls: controls that reduce the likelihood of a breakdown, such as errors or fraud, by focusing on preventative measures.

2. Detective Controls: controls that detect a breakdown after an incident to alert responsible owners that a potential corrective action is needed.

Examples of Financial Controls

Financial controls can be applied anywhere in a business or externally where financial results for that business may be impacted.

Here are a few examples of financial controls:

1. Account Reconiliations

Account reconciliations are performed to substantiate the completeness and accuracy of the balance sheet during reporting cycles. Account reconciliations are a detective control because they are performed after transactions have been recorded. This control activity identifies breakdowns in business processes, such as inaccurate or inappropriate transactions that may have been booked during the period. As a result of findings from this control, the accountant will investigate to identify a remediation and make a correcting entry as needed.

2. Segregation of Duties

.Segregation of duties are preventative controls that limit the power of single individual or group from preparing, submitting, and approving an activity. In the example of account reconciliations, a segregation of duties control would prevent the preparer of an account reconciliation from approving the same reconciliation. This action can limit an oversight in the reconciliation or even potentially fraudulent activity.

3. Internal Audits

Internal audits are often detective assessments that are performed routinely throughout the year to test the design and effectiveness of existing controls within an organization. These assessments will determine if a control is operating as designed and whether that design effectively mitigates the risk it’s intended to mitigate. As a result of these assessments, an auditor may request changes or add control procedures to drive greater effectiveness.

Financial controls may include strict qualification requirements for personnel involved in the accounting department and other areas of the business responsible for its financial management. Periodic training also ensures that staff maintain proper credentials and knowledge of the latest practices and applications within their areas of expertise.

In the area of analysis, regular and periodic review, reconciliation, and analysis of financial reports—like bank statements, the general ledger, and income statements—provide insurance against irregularities and help to identify discrepancies.

Receivable management controls can help a business identify exposure to high levels of risk as it concerns the extension of credit to current and future customers.

Similarly, thoroughly reviewing expenditures and vendor payments can help prevent breakdowns and extravagant and fraudulent spending practices.

Finally, concerning financial data, having a centralized and accessible storage application that is clean and secure helps to ensure the integrity and reliability of information concerning the company’s finances. All other functions dependent on the data will operate at a higher level of accuracy and efficiency.


Why Are Financial Controls Important?

Financial controls help a business ensure the accuracy and completeness of financial data, ultimately helping an organization manage its financial resources. In other words, financial controls can prevent and detect potential errors or malicious activity, like fraud, and allow an organization to mitigate and/or remediate breakdowns to protect the company.

What Are Some Best Practices of Financial Controls?

A business can take several steps to implement effective financial controls. Here are a few tips and recommendations:

  • Perform a thorough audit of existing procedures, chain of command, and communications protocols and prepare a risk assessment to determine where vulnerabilities may exist in the current structure.

  • Incorporate a combination of preventative and detective controls, like proper segregation of duties and oversight controls. Having several control points and a chain of command will ensure that multiple sets of eyes thoroughly scrutinize reports and analyses.

  • Invest in technology that enables workflow automation to maintain the integrity of the business’s financial data and provide the necessary support for its financial controls. Automated and technology-based controls are typically seen as safer control points.

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