Check Yourself: 5 Internal Controls You Should Have Implemented Yesterday
UPDATE (February 7, 2025): This article has been updated to reflect changes in legislation, regulations, and accounting practices since the original date of publication (March 16, 2022).
March is Fraud Prevention Month across Canada, and as we enter the busiest months of tax season, it’s the perfect time to reassess the internal controls that safeguard your business’s financial security, transparency, and integrity.
For those who can’t keep up with all the CPA lingo (who can?), internal controls are mechanisms to identify, control, and reduce the risks to your business that may arise from a failure to comply properly with laws, regulations, and best practices in your accounting and financial reporting. In other words, they’re important systems to have in place to protect your business’s operational efficiency and reduce the potential for fraud.
Now that we’re on the same page, let’s take a look at some of the most important internal controls you should implement and enhance in your business ASAP:
Preventative controls
Physical control and security of assets
This control is likely the most obvious—but also sometimes the most difficult to enforce. Restricting physical access to equipment, inventory, cash, cheques, and other critical business assets to authorized personnel is essential for protecting them from theft and misuse. Such assets should also be counted and compared to control records periodically to verify accuracy.
Segregation of duties
While some of your employees may wear multiple hats in their roles, it’s important they only wear one when handling financial transactions or operations. This ensures common errors are caught before critical or irreversible processes are executed, and it also makes deliberate fraud more difficult, as it requires collusion between two or more people.
Verification, review, and documentation
These ongoing mechanisms serve a simple yet crucial purpose: double-checking your work. Regular verification, review, and documentation help identify errors and omissions, ensuring there are no irregularities, inaccuracies, or incomplete information in your accounts and financial statements before they’re relied upon for reporting.
Detective controls
Reconciliation
Similar in purpose to verification, but different in scope, reconciliation activities provide regular opportunities to examine your business’s transactions and operations and correct errors in a timely manner. Keeping in mind our first internal control above, these procedures should be reviewed, approved, and recorded by someone outside the reconciliation process. Many businesses perform reconciliations at least monthly, though the ideal frequency depends on business size, industry, and complexity.
Internal audits
The word audit can send shivers down the spine of any business owner, but internal audits should be seen as a proactive measure rather than a reactive one. Regular audits, much like an annual medical check-up, help keep your business financially healthy by identifying any problems or errors that may be missed in day-to-day accounting and governance processes.
It’s never too late to implement and enhance your business’s internal controls, but doing so sooner rather than later could be the difference between smooth sailing or tumultuous storms ahead. Make time now to implement the above controls to protect your business, and if you need help, your DMCL advisor is here to provide the attention you need and the expertise you deserve.