How Efficient Are Your Internal Controls?

Month: March 2024

How Efficient Are Your Internal Controls?

March 20, 2024 | 7:27 am

Internal controls are one of the most important values a chief financial officer (CFO) can bring to an organization. Yet many assume business process improvement and the imposition of internal controls are the same thing or that they can’t exist together. The truth is that when controls are both efficient and effective, their value goes from good to great.

Perceptions

Internal controls—the accounting and auditing processes used in a company’s finance and operations departments that ensure the integrity of financial reporting and regulatory compliance—are a key component of financial success. Whether CFOs’ focus is on separation of duties, reconciliations, or approvals, they spend hundreds of hours a year designing, training, and enforcing internal controls.

Because of this investment in process considerations, some believe internal controls and business process improvement are the same thing. CFOs who think this way might say, “We have good controls; therefore our processes are solid.” Others believe that streamlining and speeding up processes by removing third and fourth reviews will make controls weaker. Their theory is that making controls more efficient means that some “control” corners may be cut.

But successful CFOs know that every process needs to be well controlled if results are to be delivered while maximizing resources. For example, the accounts payable process must function smoothly so that valid payments are made in an accurate, timely, and efficient manner. The path to well-controlled, efficient, and effective processes is what business process improvement is all about.

A Process Example

Recently I talked with an organization that had received many concerning comments in its external audit. The newly hired CFO immediately installed new and more expansive internal controls. One addition required that a purchase order be created for all items over $50. This purchase order needed three levels of approval. Invoices for the ordered items needed to be approved for payment by three levels. And checks in payment of the invoices had to be reviewed by four levels. As a result of the new internal controls, the organization’s negative audit comments disappeared. Yet these new steps slowed the process down.

In this organization, program operations employees completed these purchase orders and invoice reviews. They were the same employees taking heat from the board of directors for not serving the community fast enough or well enough. Adding more approval steps was achieving an appropriate degree of quality control, but it was also expanding the staff’s workload. How could the organization both serve the community as needed and maintain tight controls?

This team used business process improvement to solve this conundrum. First, we outlined the goals of the process, including the need for airtight internal controls. Then the team rebuilt the processes, identifying value-added steps and waste. Some of these wasted steps were the creating and fixing errors, commonly called rework. The process went from 110 steps to 64 steps despite internal controls increasing significantly. Assured that their concerns had been appropriately addressed, the auditors signed on off the new process. With a well-founded, secure process in place, both the organization and the community achieved a win.

Conclusion

Every organization needs to have solid internal controls in place to fulfill its mission with confidence and integrity. Business process improvement is an excellent way to build controls into work steps without compromising effectiveness and efficiency.

About Lee Kuntz and Innovation Process Design

As founder and president of Innovation Process Design, Lee Kuntz has spent over two decades using process improvement to solve the unique challenges faced by leaders of complex service organizations. Through expert training and coaching, she helps teams look at their work with new eyes, transform how work gets done, and create real results. Contact Lee with questions or to talk about your situation and what you want to achieve.

Contact Lee today to discuss your challenge.