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The Importance of Internal Controls

Internal controls are the processes that a company has in place to prevent and detect both errors and fraud.  Internal controls are thought of most often in accounting, but they can protect from data breach, inventory or cash theft, and operations errors.

Every company should have some form of internal controls.  The controls will vary depending on the nature of the company and the risks of its business processes.  The US Mint has very intricate controls that prevent employees from stealing materials, finished product (coins), and equipment.  For example the US Mint counts coins produced and searches employees as they exit the production facility.  A small landscape business may also have controls to determine that equipment has not been stolen or lost.  In this case, each piece of equipment may have a place, and an owner or manager may do a daily or weekly review of the items.

There are two broad types of internal controls: preventative and detective.  The names say it all.  Preventative controls attempt to prevent fraud and errors before they happen.  Detective controls review information to determine if any fraud or errors have occurred.

Preventive Controls

Preventive controls are proactive. They are aimed at discouraging errors and irregularities. Some examples include

Detective Controls

Whereas preventive controls are designed to discourage errors and irregularities, detective controls are designed to find them after they have occurred. Examples include the following:

Often controls are set up in response to an issue.  Every business should consider implementing a mix of preventive and detective controls before major issues arise.

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