Companies are faced with a variety of challenges every day, including external and internal risks. While external risks have their origins in the markets, geopolitical events, or natural disasters, internal risks primarily relate to one’s own business processes. Processes ca be error-prone or fundamentally inefficient and, in the worst case, lead to production downtimes, quality problems, higher costs, and overall customer dissatisfaction. To avert such undesirable consequences, an internal control system (ICS) is the method of choice.
An internal control system is a versatile instrument that creates a solid foundation for long-term success through comprehensive control of the process landscape and that can be used in various fields of a company. Here are some of the key areas in which internal control plays a central role:
Companies can use an ICS to record and evaluate potential process risks. This allows them to develop strategies to proactively respond to risks and protect their business in the future.
An ICS monitors and controls a company's business processes. This includes, among other things, identifying bottlenecks, effectively distributing resources, and ensuring efficient process flow.
An ICS supports companies in auditing financial transactions, accounting and reporting tasks. Ensuring that these activities are accurate and reliable prevents fraud and accidental financial errors.
An ICS helps implement procedures and comply with internal and external policies. By fully adhering to all compliance requirements, companies can largely reduce their legal risks.
Information and Communication
An ICS improves communication within an organization. This includes providing clear instructions, guidelines, and reporting tools so that employees can competently navigate the control landscape.
An ICS is used to monitor and evaluate the effectiveness of an organization's established internal controls. This ensures that regular reviews, tests, and audits are carried out properly.
Commercial Code (HGB)
Financial control (accounting and bookkeeping system) of a company is an integral part of an ICS. The auditor's task is to assess these systems to determine whether they comply with the legal requirements in accordance with Sections 317, 321 and 322 of the German Commercial Code (HGB).
IDW PS 261
The German standard for auditing the internal control system provides detailed instructions for carrying out ICS audits. The gathering of information during the audit is defined as a dynamic process that results in a summarized assessment of inherent and control risk. During this process, the auditor is obligated to review the company's ICS.
Corporate Code (UGB)
According to Section 269 Paragraph 1 UGB, the audit of the annual financial statement must include the internal control system’s accounting records to ascertain not only the accuracy of financial data but also to determine whether the company has complied with all legal requirements.
Stock Corporation Act (AktG) / Law Concerning Ltd Companies (GmbHG)
According to Section 22 Paragraph 1 GmbHG and Section 82 AktG, managing directors and board members are obliged to maintain an accounting and internal control system.
- Code of Obligations (OR)
According to Article 728a OR, the Swiss OR specifically requires companies to use an internal control system to ensure that the annual and consolidated financial statements comply with the law, the Articles of Incorporation, and the chosen accounting standards.
A well-organized ICS offers companies both quantitative and qualitative advantages. While the quantitative benefit is difficult to measure – as it would only show up if the risk were in fact to occur – the qualitative benefit becomes apparent, for example, via a reduced number of process errors, improved customer satisfaction, or the successful adherence to compliance requirements. The actual added value is broad:
Major Risk Reduction
By systematically identifying risks and process weaknesses, an ICS helps to minimize financial losses, reputational damage, and legal problems.
Improved Resource Utilization
Integrated risk assessment enables companies to focus their resources on the business processes that are most critical to their success.
Coordination, automation, and centralization of controls eliminate task redundancies, saving the organization time and costs.
Aligning controls with strategic corporate goals enhances operational efficiency and provides management with a valuable basis for informed decision-making.
An ICS creates trust among employees, investors, clients, and other stakeholders by creating a transparent risk culture that not only aims to prevent but also control risk.
A well-documented risk landscape allows companies to make necessary investment decisions and respond quickly to risks and control weaknesses.
The successful introduction of an internal control system requires thorough planning and a clear strategy.
To develop a successful internal control system, it is worth using the COSO II ERM framework as a reference. It considers the structure of an ICS and distinguishes between components, target categories, and application levels, each of which is further divided into different points. While the framework provides practical guidance, it should always be tailored to the organization's specific situation and risk landscape.
If possible, the ICS should be integrated into existing risk management and an already structured process landscape. By recording risks and establishing which ones should be prioritized, risk management lays the foundation for an efficient control structure within the ICS. This cross-process approach results in holistic synergy effects, preventing double work and freeing up resources.
Having the full support of top management is crucial from the beginning, as they bear the ultimate responsibility for the effectiveness of the ICS. It is incumbent upon management to delineate strategic goals, assess priorities, and decide on how to best allocate resources.
To achieve greater internal understanding of control-related policies and procedures, clear documentation is essential. In addition, employees should be trained in advance so that they are sensitized to their new responsibilities and the importance of internal controls.
Companies often still use Excel solutions to manage their process risks and associated controls. However, the more complex business processes become, the more confusing and riskier such an approach is.
In this regard, the use of specialized ICS software produces relief as it enables organizations to centrally manage their process risks, optimize controls and, as a result, increase overall performance.
This results in several advantages:
- Increased efficiency through automation of monitoring and control processes
- Real-time monitoring of business processes and comprehensive reporting
- Scalability of the control system without interruptions in performance
- Integration of the ICS into existing business and risk management processes
- Easier adherence to all compliance requirements through control standardization
- Higher quality of control and improved allocation of responsibilities
Before acquiring an IKS software solution, you should ensure that it meets the specific needs and goals of your company. With BIC Internal Control, you have a ready-made standard solution that can be seamlessly integrated into your current risk management. A popular combination is also that with BIC Enterprise Risk, which allows you to conveniently control and manage your risk management and internal control from one central platform.
Here are three key reasons why you should choose BIC Internal Control:
Integrate BIC Internal Control into your current processes, adapt the content to the needs of your company, and continuously expand your internal controls.
Reliable Asset Protection
Secure your corporate assets through a risk-oriented audit approach by efficiently recording, assessing, and managing inherent risk, control risk, and detection risk.
Highest Audit Security
Ensure full compliance of your company with all internal and external requirements, providing auditors in advance with all the necessary and relevant information.