3 Types of Internal Controls (To Safeguard Your Assets)

Unfortunately, global trends show that organizations lose 5% of their annual revenue to fraud, with the average incident costing $1,662,000, and 22% of cases costing over $1 million. Over half of fraud incidents occur due to lack of internal security controls (32%) or an override of existing controls (19%).

This blog highlights how to implement effective internal controls that keep assets safe and secure with asset tracking technology.

Main takeaways from this article:

• Internal controls ensure operational efficiency, reporting reliability, and regulatory compliance, mitigating fraud and theft risks for companies.
• Components of internal controls include controlling environments, risk assessments, control activities, information and communication transparency, and monitoring procedures.
• Internal controls are divided into three groupings: preventive, detective, and corrective.
• Implementing internal controls protects assets, prevents fraud, improves financial reporting, and increases operational efficiency.
• Factors such as human error, fraud, and cost can pose challenges to internal controls.
• Steps for setting up internal control systems include assessing risks, defining control procedures, assigning responsibility, training staff, and adopting asset tracking technology.

What Are Internal Controls?

Internal controls are procedures organizations use protect assets, organizations, and stockholders by mitigating risks such as fraud, theft, and accounting errors. For example, checking asset ledgers against actual physical inventories helps organizations identify suspicious patterns that might indicate ongoing theft.

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.

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 three primary controls are:

• Preventive Controls
• Detective Controls
• Corrective Controls

1. Preventive Controls

Preventive controls implement safeguards in anticipation of likely risks. They form the first line of defense against risks to assets.

Examples of preventive controls include:

• Asset tracking software like RedBeam to monitor resource existence and locations
• Use of  asset tags with barcodes or passive RFID capabilities coupled with RedBeam to identify resources
• Authorization procedures for activities such as procurement and invoicing
• Physical safeguards such as fixed RFID readers set with RedBeam workflows to sound alarms when assets are removed from the area
• Security guards
• Video surveillance

Preventive controls promote operational efficiency by automating control activities and reducing time and cost expended on corrective controls.

2. Detective Controls

Detective controls seek to identify errors, irregularities, or other signs of risks or threats to assets. 

Examples of detective controls include:

• Inventory counts and Asset audits with RedBeam which allow operational staff to survey asset conditions
• Bank reconciliations
• Log monitoring
• Tying out financial statements
• Performance metric reviews
• Exception reports

Detective controls identify discrepancies and anomalies that signal the existence of active threats. They proactively intercept problems before they can escalate while helping promote consistency and accuracy.

3. Corrective Controls

Corrective controls address issues that have been identified by detective controls. They implement mitigations to resolve threats until updated preventive controls can be installed.

Examples of corrective controls include:

• Backup procedures
• Disciplinary actions
• Policy updates
• Procedural updates
• Modifying your  asset check-in and check-out system with RedBeam.
• Updating report filing procedures
• Updating auditing procedures
• Improving physical security measures

Corrective controls serve as a secondary line of defense to reinforce preventive and detective controls. If your preventive controls are working effectively, you should be spending minimal time on corrective controls.

Components of All Internal Controls

The Committee of Sponsoring Organizations of the Treadway Commission (COSO) has identified five pillars of an effective internal control integrated framework: control environment, risk assessment, control activities, information and communication, and monitoring activities. 

Control Environment

The internal control environment consists of the structures and procedures that constitute the framework for executing controls within an organization. These include the company culture and values defined by the board of directors and senior management, authorization for implementing controls, recruitment policies, and performance measurement procedures.

Risk Assessment

Risk assessment identifies events that could impact asset security and assesses their likelihood and impact. Conducting risk assessments helps organizations identify ways to mitigate internal risks such as  theft and external risks such as supply chain disruptions.

Control Activities

Control activities consist of policies and procedures that provide reasonable assurance of an organization's asset risk mitigation policies being carried out. They can be designed to prevent, detect, or correct risks and may include both automated and manual safeguards.

Information and Communication

Internal controls depend on a constant, up-to-date flow of accurate information about assets and communication of that information both within organizations and with outside parties. RedBeam Asset Tracking tools help organizations complete physical audits to keep these up-to-date counts. Users can then easily share that data with the appropriate parties such as internal auditors and external auditors. 

Monitoring Activities

Proactive monitoring of internal controls helps ensure their effectiveness. Ongoing evaluations and periodic evaluations can help assess whether existing controls meet organizational standards and when adjustments are needed.

Physical Safeguards

Certain control activities depend on physical safeguards to secure  facility assets, inventory, and IT equipment assets. These can include measures such as locks, access controls, and surveillance systems. RedBeam fixed RFID solutions allow users to create workflows and API integrations to manage these systems.

Separation of Duties

By using the distribution and clarity of responsibilities between multiple departments, organizations reduce asset risks. For example, separating purchase requisitioning from purchase approval reduces the risk of improper purchases.

Compliance Activities

Laws and regulations provide external constraints that reduce asset risks. Organizations can support these safeguards with internal policies that promote regulatory compliance.

Benefits of Implementing an Effective Internal Control System in Your Business

Internal controls are necessary if you want to keep your assets safe, whether from theft, fraud, or preventable damage. Unfortunately, fraudulent activity occurs in businesses, resulting in losses in the thousands or even millions, and it’s more common than one might think.

For example, an administrator at Yale University was caught stealing electronics for years amounting to over $40 million.

Effective controls can be set up to help  track your assets, identify issues ahead of time, and determine how a breach occurred (so you can prevent it in the future).

Establishing internal controls also improves the accuracy of your financial reporting. Monitoring discrepancies helps spot errors and reconcile the asset ledger with  verified physical asset counts with RedBeam, aligning  balance statements with the actual assets. 

More accurate financial reports mean more precise expense forecasts. The enhanced accuracy provided by internal controls gives more realistic expectations of upcoming procurement and maintenance expenses.

Limitations of Internal Controls

Internal controls mitigate risks, but they can't eliminate them entirely:

• Human Error: No matter how well your internal control systems are designed, data entry errors, miscommunication, and oversight lapses can still occur. You can offset human error by leveraging automated tools such as  cloud-based asset tracking software. Fixed with barcodes to mitigate human entry and even automated reads, entirely evading manual scanning, RedBeam can help offset human error.
• Collusion and Fraud: Human malice also can undermine your internal controls. For example, employees who know your internal controls may collude to bypass them to commit fraud. You can mitigate this risk to an extent by following good hiring screening practices and enacting employee training and monitoring.
• Cost vs. Benefit: There's no way around the fact that internal controls can incur expenses, both in terms of money and in terms of labor and time. You can't avoid the cost of internal controls, but you should conduct a cost-benefit analysis to ensure your organization that internal control expenses are worth your investment. The investment may have a great ROI. 
• Management Override: Even if you implement great internal controls, managers with high-level access privileges may have the ability to override them. For example, a manager may have the capability to ignore segregation of duties restrictions on procurement requests, even if this goes against your written policy. Company culture plays a leading role in mitigating this type of risk by instilling the importance of all team members following internal controls.

Defining Your Organization’s Internal Control System

To start setting up internal controls: 

• Designate a manager responsible for building your control environment in coordination with upper management and stakeholders, using their input to establish internal control objectives
• Conduct a risk assessment to identify potential risks and assess their likelihood and impact
• Design preventive, detective, and corrective internal control activities, and select appropriate technology to automate your procedures, such as asset tracking software like RedBeam
• Establish mechanisms for capturing asset information, such as asset tag scanning with RedBeam Asset Tracking or RedBeam RFID, and communication protocols for sharing information
• Select key performance indicators to monitor internal control effectiveness and set up monitoring systems to track them

After following these steps to define your internal controls, use feedback from your monitoring procedures to continually update and improve your control systems.

Establish Internal Controls & Protect Your Assets with RedBeam 

RedBeam, much like adopting internal control, increases the efficiency of your asset management, improves the reliability of your reporting, and streamlines regulatory compliance to guard you against fraud, theft, and other risks. Adopting preventive, detective, and corrective control activities can dramatically reduce risks to your assets and protect your company's profitability.

Technology plays a key role in establishing internal controls by allowing you to automate critical control activities. RedBeam's world-class fixed asset tracking platform provides you with a cloud-based interface that lets you leverage barcode and RFID asset tags and mobile scanning technology to automatically capture and update asset information, making it easier to keep your books consistent and identify discrepancies. RedBeam supports SOC 2 Type II compliance, ensuring your data's security and privacy and protecting your asset information from unauthorized access.

Protect your assets with a  free trial of RedBeam today.

FAQs

What is An Organization's Control Environment?

Your organization's control environment is composed of the structures and procedures that establish your framework for executing internal controls. It includes the company culture and values adopted by your board of directors and senior management, authorization for control implementation, recruitment policies, and performance tracking procedures.

What's the Difference Between an Internal Audit and Internal Controls?

Internal controls center around procedures to prevent, detect, and correct risks to your assets, while internal audits are a method for detecting risks reflected in discrepancies and reviewing the effectiveness of internal controls.

How Do Internal Controls Help with Safeguarding Assets?

Internal controls protect assets by creating procedures to prevent, detect, and correct risks that threaten assets.