How to Write Internal Control Procedures (Read this first!)

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What are internal control procedures?

Internal control procedures are a way of protecting a business and ensuring that its finances are being acquired legally. These procedures ensure that the finance channels are legitimate and compliant and put forward a set of rules to prevent any malpractices by employees.

These internal controls ensure that the organization runs smoothly and with as few risks as possible. They minimize the chances of an error and ensure that operations are smoothly taking place. Data breaches, theft, and fraudulent dealings become much harder with these internal control checks.

However, the size of your internal control system depends entirely on your organization. The bigger your operation, the bigger your internal control wing needs to be to ensure end-to-end compliance throughout the supply chain – from the producers to the salesmen.

Examples of internal control procedures

The most common example of internal control is that of a team of auditors and accountants overseeing the business's finances. However, because so many different types of businesses do a wide variety of things, different internal controls have evolved over the years.

Some examples of the current internal control procedures at work in the industry are as follows:

Separation of duties

This involves dividing the tasks between multiple employees. Not only does that ensure that any fraudulent behavior would be caught immediately but it also reduces the risk of errors as multiple people would review your data.

You can give different duties, like bookkeeping, payments, invoicing, etc., to different employees within the accounting team.

Restricting accounting system access

To prevent fraudulent data from being caught, the culprits might try to manipulate the files on your servers. Therefore, to ensure that no forgery takes place and the data on your servers is safe from any internal threats, you can grant accounting access to a select number of employees.

You can keep a log of whenever the employees log in, what they do when they have accessed the system, and when they log out. This will allow you to make sure that nothing fishy is going on. And if something goes wrong, you can always come back to the system logs to check who worked on the non-compliant files.

Access control management not only helps prevent threats but also nullifies and rectifies them once they have been exposed.

Physical storage and audits

In today's age, everything has gone digital. However, with all the convenience of digital technology, there's also the threat of digital attacks. Therefore, some companies tend to keep their most sensitive data offline.

You can follow suit. You can keep your data offline to make internal security breaches even harder. Plus, you can assign physical audits to your team instead of just relying on a digital inventory log. This will ensure that all the cash is counted manually and the products verified on-site.

It also ensures that you do not find any unforeseen discrepancies between your electronic records and your products.

Consistency in documents

Some discrepancies between your audit and your digital records might arise due to human error. Therefore, it's best to devise templates for all your records to minimize variations. This includes things like expense reports, invoices, salary charts, etc.

Eliminating – or at least minimizing – human error is critical for achieving complete internal control.

Regular trial balances

Make sure you run trial balances regularly, on a weekly or daily basis. This would ensure that any discrepancies are picked up early in the system and can be dealt with swiftly.

Approval requisite

It's also great to roll out a policy that requires certain high-profile financial actions to be pre approved by managers. This would help you ensure that nothing goes past the managers.

And in case the managers themselves are involved in some shady business, it will be very easy to trace the non-compliant transactions back to them because they will be the point of origin for those finances.

This helps add an additional layer of security to your transaction data and helps minimize the likelihood of fraudulent financial transactions making it past the checkpoints.

Most organizations would use some or all of these internal control points, depending on the nature of their business, the sensitivity of their data, and their budget. However, these policies have one single aim: ensuring compliant financial processes to stay out of legal trouble.

How to document internal controls and processes

Documenting internal control procedures in different manuals is essential for the smooth running of any business. These manuals will become the reference points for employees to return to whenever they are unsure how to proceed in a certain situation.

Step 1: Make a table of contents

The first thing you need to do when writing internal control procedures is to create a table of contents. This will serve as an overview of what's in the document.

The table starts with the Segregation of Duties. It goes on to enlist things like reconciliations, assets, human resources, reviews, approvals, purchasing, disbursements, and contacts.

This part can also contain a little overview of the rest of the documentation. This overview will briefly touch on the different components of internal control and explain their concepts.

Step 2: Write the Segregation of Duties

This section is one of the most important sections for internal control documents. Here you will detail the different responsibilities of the different kinds of employees in your organization.

You can take this opportunity to highlight the various roles different employees play and how they are interconnected – sort of like looking at a bigger-picture situation. Explain to the employees how each of them is a critical cog who plays a certain role that helps turn the other cogs and, in turn, runs the behemoth machinery of your organization.

For instance, if one employee gets the pay, another employee has to approve their checks.

Step 3: Set up review and reconciliation sections

These sections are the relatively more actionable sections of your internal control manual.

In the review section, you need to describe different procedures for compressing the company's data to ensure that everything is documented correctly. This entails routine investigations into the budget, checking transactions, and dissecting anything that seems out of the ordinary.

It must be checked and fixed if your managers discover something fishy during their reviews. That's where reconciliation comes in.

For the reconciliation section, you will have to define elaborate procedures for situations where discrepancies are discovered in the company's finances. This would involve details on how to carry out a thorough, transparent investigation into the differences.

Moreover, once the source of the error has been discovered, the reconciliation section will detail how to rectify it.

These sections serve as your last line against fraudulent transactions. Therefore, make sure that these sections are thorough and actionable. Use simple and clear words to ensure there's no room for anything to be lost in translation.

Step 4: Write the Approvals, Assets, and Distributions procedures

These parts are a little less actionable than the preceding section. They contain detailed procedures for handling approvals, assets inventory, and distribution channels.

The approvals section would contain details about employees who can authorize different transactions. Usually, these would be employees considered "responsible" and holding key management positions. Employees who are well-informed about the in-and-outs of the company can also be authorized to make approvals.

The assets part would have an inventory of the different assets that fall under the company's umbrella. This section will explain in-depth procedures for handling and monitoring each asset.

The distributions part of the internal control manual would have details about how disbursements of payments are made internally. This would also include information about payrolls.

Step 5: Add sections on HR, purchasing, and resources

Great job! You have completed the final step of writing your internal control manual. All you need to do now is add three more sections: human resources (HR), resources, and purchasing.

The HR section contains details for the HR team on how to deal with employees, store and use their information, and educate the employees about company policies.

Secondly, we have the purchasing section. The name is pretty self-explanatory. This section contains details on what to do when making purchases for your company. This also includes details on when to seek approvals. For instance, some research institutes might allow employees to purchase reagents for up to $500, but any order bigger than that might require approval by the lab manager.

Lastly, you need to add details about the contacts section. This is a list of all the internal and external people that can be contacted in case of an emergency or for support. This will include the contacts for all the emergency staff on campus.

Moreover, it will include people like suppliers, people who handle marketing (in case you need to get something out there), and people who run different facilities.

It should also contain the contact details for an ombudsperson. This is usually someone outside the company who can be reached out to for any complaints against your colleagues. The ombudsperson hears you out anonymously and conveys your message up the chain of command.

Thus, to help the employees feel safe in expressing their grievances and dealing with them through an official channel, the details of an ombudsperson are crucial for any internal control manual.

Conclusion

Writing internal control policies is difficult because you must ensure everything is phrased correctly and clearly. Using wording that leaves any room for debate can become an Achilles heel for the company because it can be used in lawsuits against employees who violate internal control policies.

However, with this guide, you can write the best internal control policies in five easy steps.

If you are stuck on some point, here's a trick: put yourself in the shoes of the employee your point is directed at and think about what you would want to know if you were in their position. That should help you understand exactly what to write.

But sometimes, just writing things down might not be the clearest way to represent them. Therefore, you might need to create tutorials-like documentation for various sections. But that's incredibly laborious.

Not only would you have to do all the steps yourself, but you also write them down. But what if we told you there was a tool that could automatically do the writing for you as you did the steps on the screen?

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