The Effects of Internal Control to the financial performance of a company

How does internal control affect the financial performance of a company?

Internal control is an interlocking set of activities that are layered onto the normal operating
procedures of an organization, with the intent of safeguarding assets, minimizing errors, and
ensuring that operations are conducted in an approved manner. Another way of looking at internal
control is that these activities are needed to mitigate the amount and types of risk to which a firm
is subjected. Controls are also useful for consistently producing reliable financial statements.
(Internal Control Definition, 2021)
The importance of internal controls should never be minimised as they are an essential aspect of risk
management, financial health and compliance in business operations. They help a business owner (or
the person/persons responsible) to monitor financial operations with accurate reporting and full
oversight. This minimises the risk of damage to a business through fraud and helps to protect a
business’s financial resources. (Pretorius, 2019)
Internal control enhances the reliability of financial reporting and helps to ensure that financial
statements are free from major misstatements. This is important because stakeholders such as
business owners, investors and lenders all rely on financial reports to make decisions. Without
internal control, businesses face an array of exposures that can drastically alter revenue generating
capability (DeBenedetti,n.d.).

Advantages of internal control

 Internal controls are accessible to a limited number of trusted upper-level employees. The fewer
people involved, the easier it is to oversee their actions and guard against irregularities.
 Properly designed and executed internal controls increase efficiency by making transactions
transparent to any business unit needing them.
 When internal controls are well-balanced between providing transparency and encouraging
efficiency, they protect employees from accusations of irregularities or misappropriations of
funds.

Disadvantages of Internal Control

 There is no foolproof way to ensure that employees do not override those controls because
human behavior is an unpredictable element in the internal control process.
 If a company poorly plans or incorrectly implements its internal controls, employees using
them may become frustrated and apathetic about enforcing them.
 If a company's internal controls are too rigid, they may inhibit the flexibility a company needs
to make operational shifts as needed to stay effective
References:

AICPA. (2014). The importance of internal control in financial reporting and safeguarding plan

assets. AICPA.

Brent, M. (2019, January 25). Advantages & Disadvantages of Internal Control. Bizfluent.

https://bizfluent.com/info-8064250-advantages-disadvantages-internal-control.html

DeBenedetti, J. (n.d.). Why Are Internal Controls Important in Financial Statements?

Smallbusiness.Chron. https://smallbusiness.chron.com/internal-controls-important-

financial-statements-80211.html

Indeed Editorial Team. (2021, February 23). Internal Controls: Definition, Advantages, Disadvantages

and Examples. Indeed. https://www.indeed.com/career-advice/career-development/examples-

of-internal-control

Internal control definition. (2021, April 15). AccountingTools.

https://www.accountingtools.com/articles/internal-control.html

Pretorius, E. (2019, September 14). The importance of internal controls and the objectives.

Tat.Accountant. https://www.tat.accountant/the-importance-of-internal-controls/