Internal Controls: 3 Limitations That Your Company Should Anticipate
Internal controls play an important role in preventing fraud in any company. According to ACFE’s 2014 Global Fraud Study, a lack of internal controls is a major contributing factor to nearly one-third of fraud cases.
As the saying goes, ‘No rose without a thorn,’ even though your company has tried to set the best internal control possible, there are always limitations that would prevent it from working perfectly. Therefore, it is crucial for your company to conduct evaluations from time to time and to monitor the implementation of the internal controls.
A study titled The Impact of Weak Internal Controls on Fraud, mentions some limitations to internal controls. Three of these limitations are human error, overriding aspects of internal controls, and collusion. The study employed a mixed method of data collection and analysis, along with face-to-face interviews and archival analysis.
- Human error
The effectiveness of internal control is limited by decision making that are based on human judgment. Humans may not understand how an aspect of internal control works, they may misjudge, or under certain conditions make decisions that do not follow the provisions of the internal controls.
For example, employees may not understand how to make reports through a whistleblowing system. Such limitations can be anticipated by providing education and training of the whistleblowing system to employees. Integrity Indonesia, with more than fifteen years of experience in the compliance industry, is ready to assist your company in setting up and implementing a whistleblowing system, namely the Canary® Whistleblowing System. Our service includes providing communication and training support for your company’s employees. Contact us for more information about Canary®.
- Overriding aspects of internal control
Due to their power and authority, managers could override aspects of the internal controls. Under high pressure circumstances, a manager may take action in the best interests of the company by ignoring the prescribed procedures. The worst case scenario is when they override internal controls for personal gain; for example, they could deliberately use various tactics to hide the company’s bad financial conditions.
This limitation can be anticipated by building a healthy company culture by setting the tone from the top. This could be done by building awareness, creating open communication, and encouraging employees to raise concerns over any red-flags through a whistleblowing system.
Even an internal control system that looks perfect can still be circumvented by the collusion of employees. An example would be employees in the purchasing, inventory, and financial departments collaborating to make fictitious purchases. With collusion, fraud is more difficult to detect by the control systems. Your company can anticipate this limitation by periodic monitoring and consistently developing transaction and recording systems.