Internal Control System: Ensuring Effective Risk Minimization and Compliance in Companies
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.
What Is an Internal Control System?
An internal control system is the safety net of a well-run organization. By considering financial aspects as well as operational and strategic dimensions, an ICS ensures the smooth, efficient, and legally compliant execution of business processes.
With the help of an internal control system, companies can record, evaluate, and manage risks related to their documented processes. What is more, clearly regulated control processes ensure that employees understand and comply with the established rules. It must, however, be emphasized that an ICS is much more than a mere collection of rules and procedures - it is a comprehensive strategy designed to protect your company assets, avoid business-critical errors, and ensure complete compliance both internally and externally.
The areas of application relate to both financial aspects (e.g., the accuracy of accounting) and operational/strategic dimensions. By providing reliable data and information, an ICS enables management to make informed decisions and helps your company stay on course despite any adversity.
What Aspects Does an Internal Control System Include?
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:
Risk Assessment
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.
Process Control
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.
Financial Control
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.
Compliance Control
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.
Monitoring
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.
What Are the Legal Requirements for Internal Control?
Aside from the fact that monitoring its processes and ensuring their efficiency is in every company’s best interest, additional legal requirements exist that are relevant for businesses. In the DACH region, the following regulations can be found:
Germany
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.
Austria
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.
Switzerland
- 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.
It is important to note that these legal requirements can vary depending on the size of the company and the industry. It is therefore best to always familiarize yourself with the laws and standards that are relevant to your specific situation.
What Added Value Does an ICS Bring?
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.
Significant Savings
Coordination, automation, and centralization of controls eliminate task redundancies, saving the organization time and costs.
Strategic Alignment
Aligning controls with strategic corporate goals enhances operational efficiency and provides management with a valuable basis for informed decision-making.
Strengthened Trust
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.
Competitive Advantage
A well-documented risk landscape allows companies to make necessary investment decisions and respond quickly to risks and control weaknesses.
Tips for Introducing an Internal Control System
The successful introduction of an internal control system requires thorough planning and a clear strategy.
COSO II ERM Framework
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.
Integrated Approach
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.
Top-down Engagement
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.
Training and Awareness
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.
What Advantages Does an ICS Software Solution Bring?
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
Internal Control with BIC GRC
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:
Complete Adaptability
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.
Which BIC Solution Is Right for Me?
Be it a customized or ready-made solution – at GBTEC you will find the right software for your internal control requirements. Our out-of-the-box solution BIC Internal Control includes all common control standards to give your company the security it deserves. If you prefer an individual approach, BIC Custom GRC gives you the opportunity to precisely reflect your specific requirements.
See for yourself and establish a comprehensive internal control system that will lead your strengthened company into a bright future.
BIC Custom GRC
BIC Custom GRC offers flexible custom solutions that can be tailored to your unique processes.
BIC Internal Control
BIC Internal Control is our intuitive standardized solution that meets common standards and is easy to implement.
GBTEC Software AG
Gesundheitscampus-Süd 23
44801 Bochum
Germany
Further Information
Career
Webinars & Events
Videos
Podcast
Newsletter