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Imagine you woke up one day to discover your assets were missing.
Several computers, cars, or laptops are gone. But you have no idea who did it or how it happened.
To keep your assets secure, you need to ensure you set up the right internal controls to safeguard your assets.
Internal controls are processes organizations set up to protect your business against financial or technological risks. Often, this means ensuring financial reporting and asset auditing are done regularly and effectively to ensure compliance with laws, regulations, and policies are met.
Simply put, internal controls include anything that mitigates risks to an organization.
These controls include specific protective processes and security walls to protect your assets from an unexpected threat. These internal controls also include procedures to ensure your assets are in good working condition.
This article will analyze three core internal controls, their differences, and why they’re crucial to running any organization or business.
Define your organization’s internal controls
Internal controls help you reduce the risk of a breach or a stolen asset. They also help prevent simply losing your assets.
While it may seem like a necessary evil, setting up internal controls is something you and your organization will benefit from in the long run.
This ensures your business remains financially stable and you maintain operational efficiency.
Your first step to protecting your assets is defining your internal controls.
The way to do this is to understand and define the risks you face every day.
When dealing with internal controls, many business leaders focus primarily on the financial aspects, such as detecting fraudulent activity. However, internal controls have a larger scope than just looking at the numbers.
Internal controls also protect your fixed assets like machinery, computers, vehicles, and other physical assets.
If you’re a manufacturer, you need to ensure your equipment is running properly to mitigate the risk of a breakdown (and an unplanned expense) or, worse yet, an injury.
If you run a business-to-business (B2B) warehouse, you need to understand the type of assets you have, the total value of those assets, who’s using them, and when they need to be maintained (and eventually replaced).
If your organization is involved in the financial world, you need to look at standards and regulations that govern financial institutions and banks.
Once you understand your organization’s objectives, you can work toward defining your risks. That way, you can implement relevant control activities (to mitigate those risks).
Once you have your objectives and understand your risks, you can home in on the three main types of internal controls (and how they help you protect your assets).
What are the 3 types of internal controls?
Every organization is subject to threats that could harm it. While most businesses don’t frequently face business-ending threats, certain risks could lead to partial or complete asset loss, and those threats need to be mitigated.
Every business faces different threats that impact their assets, from inadvertent mistakes to theft or security breaches.
To limit the risk of threats to company assets — whether financial, technological, or physical threats — companies need to ensure they have the proper internal controls set up.
The question is, what internal controls should be in place?
Three primary controls are:
- Corrective controls
- Detective controls
- Preventive controls
These are critical to keeping your assets secure from external (or internal) threats, including lost assets, theft, and asset failure due to poor maintenance.
Preventive controls
In the health world, the way to live a healthy life (and avoid sickness and disease) is to focus on prevention.
The same is true for setting up internal controls in your organization.
You should look at your business like a living organism — like a human body.
If you want to protect it, the most important way to do so is to set up the right preventative measures.
It’s easier (and less stressful) to proactively set up the right measures to prevent a problem rather than reacting to it after the fact.
Nobody wants to deal with an active security event that leaves people distressed and confused.
Preventive internal controls are the primary type — and the ones you would focus on the most — to best safeguard your assets.
By setting up the right preventive measures, you’ll be more likely to avoid a negative event from occurring.
For example, most manufacturers have hundreds, if not thousands, of physical assets, such as machinery, technology (laptops, mobile phones), inventory, and vehicles. If management doesn’t have asset tracking software set up to ensure they know where their assets are at all times, they risk losing them or having them stolen.
The same is true for maintenance. If predictive and preventive maintenance isn’t done on your fixed assets, you risk unplanned breakdowns, resulting in unplanned repair costs and replacement fees.
Another preventative control you can set up is to assign an employee to manage your fixed assets. Ideally, you can have at least one person (if not a whole team) responsible for setting up asset tracking software, keeping assets maintained, and tracking who’s using each asset.
Other examples of preventive internal control activities include:
- Using video surveillance
- Hiring security guards
- Verifying identification to different entry points in your business
The best way to start with preventive internal controls is by placing asset tags on different fixed assets so you always know where they are.
Detective controls
In a perfect world, you would have your assets automatically protected with the right preventive procedures, and we’d be done at step one.
But the reality is preventative controls aren’t enough to mitigate organizational risk.
You need to follow it by setting up the right detective controls.
Even with all possible preventative controls set up, security events are still possible.
Think of detective controls as your next line of defense in safeguarding your assets; Detective controls are what happens after a breach occurs.
You know the show CSI? Where crime scene investigators are called upon to piece together why a crime happened?
Well, that’s what detective controls are. It’s trying to understand the reason(s) an asset was compromised, lost, stolen, or broken so you can improve your preventative controls.
A few questions you could ask when an asset breach occurs are:
- What caused it?
- Who was involved?
- What preventive controls failed to prevent it?
- What policies or processes can be modified to prevent the event from happening again?
Some of the most practical types of detective controls include analyzing reports such as monthly statements on your assets and reading through asset audit results.
Corrective controls
Once you’ve set up preventive controls and understand the reason a breach occurred through detective controls, it’s time to incorporate the third internal control to safeguard your assets — corrective controls.
Corrective controls are the actions you take after you’ve detected a problem.
Once you’ve discovered a breach, flaw, or risk, it’s time to work on a solution to fix it and prevent future breaches.
You can set up corrective controls in several ways:
- Updating policies
- Modifying your asset check-in, check-out system
- Considering disciplinary action
- Updating the way you file reports
- Updating how you audit your assets
It could also be as practical as updating the lock on your warehouse door to prevent a thief from breaking in.
Remember, the goal is to focus on stacking up the right preventive measures so you can spend less time fixing breaches.
Benefits of implementing internal controls in your business
Just how important is it to set up internal controls in your business?
Considering retailers lost $112.1 billion from theft in 2022, there’s a substantial monetary reason.
Internal controls are necessary if you want to keep your assets safe, whether from theft, fraud, or preventable damage.
Here are some reasons you need to implement the right controls:
1. Safeguard your assets
The number one reason you should set up the right internal controls in your organization is to keep your assets safe.
Internal controls can help you prevent, identify, and fix issues related to your assets.
Effective controls can be set up to help you track your assets, identify issues ahead of time, and determine how a breach occurred (so you can prevent it in the future).
By taking an active approach to knowing what’s going on with your assets (and putting the right processes in place to mitigate risks), you’ll be able to ensure you reduce asset losses and the subsequent expenses associated with those losses.
2. Prevent fraud
Unfortunately, fraudulent activity occurs in businesses, resulting in losses in the thousands or even millions — and it’s more common than you might think.
For example, an administrator at Yale University was caught stealing electronics for years amounting to over $40 million.
Internal controls like strict audit procedures and different checks can help prevent fraud so you keep your assets secure in your organization.
3. Accurate reporting and cash flow forecasting
Without internal controls, you don't truly know what’s happening with your assets. Fraud, theft, and equipment breakdowns could occur regularly, but how would you know?
Internal controls can clarify the health, condition, and financial reporting associated with your assets.
For example, you can set up asset tracking software to give you a complete count of your equipment, the value of each asset, and who is using it.
This means you’ll be able to see if there’s a breakdown with your equipment (or if something’s gone missing).
You can also see when maintenance is scheduled, allowing you to understand how much you’ll spend on maintenance.
By understanding your assets through internal controls, you’ll be able to accurately forecast upcoming expenses so you can better manage your cash flow.
4. Improve operational performance
Beyond protecting your assets, there’s one often overlooked benefit of setting up internal controls.
By implementing internal controls effectively, you’ll be able to improve the efficiency of your operations.
For example, by setting up regular maintenance on your assets to prevent a breakdown, you’ll have fewer interruptions and operational standstills, allowing you to work more efficiently.
Plus, with an asset tracking system, you’ll be able to quickly find where different equipment is so you can complete tasks faster.
How RedBeam helps protect your assets
Your assets are your business.
If you leave them exposed to risks, you’ll end up with lost, stolen, and broken-down assets.
The result is reduced performance, increased expenses, and major headaches from constantly trying to put out fires.
You need the right technology to set up the right internal controls and safeguard your assets.
That’s where RedBeam comes in.
It’s a world-class asset tracking system that helps you set up preventive, detective, and corrective controls to protect your assets.
With RedBeam, you get a single platform that helps you tag, track, and optimize your assets.
Whether you want to protect your machinery, computers, inventory, buildings, or other fixed assets, RedBeam’s intuitive platform has you covered.
Additionally, RedBeam is built with SOC 2 Type II compliance to ensure your data is secured on our system. This means you’ll have complete privacy and can protect your internal data from unauthorized access.
Protect your assets with a free trial of RedBeam today.
