The Sunday Mail
FINANCIAL markets do not like surprises and increasingly, the investment community is scrutinising company disclosures mainly relating to corporate governance standards, risk management processes and internal control structures as part of their investment decisions.
A survey conducted by Ernst and Young in 2005 showed that 69 percent of investors said transparency is a top priority when considering an investment, with 82 percent saying they will pay a premium for companies that demonstrate a successful approach to risk management.
Clearly internal controls play a significant role in companies.
What are internal controls one may ask? Internal control, as defined in accounting and auditing, is a process for assuring achievement of an organisation’s objectives in operational effectiveness and efficiency, reliable financial reporting and compliance with laws, regulations and policies.
Some people say internal controls are a system that a company uses.
Weak internal controls expose a company or even country to several potentially damaging risks while strong internal controls minimise risks in a company or country.
Several business owners have asked me how I manage my funds and my answer has been simple; I tell them to put good internal controls in place and comply with those controls.
Most single owners and family businesses struggle to put strict control measures.
I have experienced cases where businesspeople demand and/ or withdraw cash at will.
In most cases the company accountant will not have a clue how the money was used and they cannot ask because they want to protect their job.
Such actions by entrepreneurs show signs of weak internal controls and usually, the company is affected in the long run.
Practical examples of internal controls are appointing someone to approve payments and a different person to authorise, banking cash regularly, having dual signatories before withdrawing company cash, preparing budgets, having an accounting system, putting limits on cash withdrawals, debtors and creditors and tagging fixed assets.
One could be a seasoned businessperson but without effective internal controls chances of getting surprises in future are real.
Internal controls are crucial as they will minimise the risk of such surprises.
Imagine a mining company with workers who do not have adequate safety gear?
If accidents happen, they could turn out to be monumental disasters.
Safety gear minimises damage and is therefore part of internal controls.
Businesspeople who feel their internal controls are inadequate can seek assistance from experts so that they set up the best internal controls for their companies.
However, it is important to a simple internal control manual that anyone can easily implement.
The problem with complex internal controls is that some roles end up being repeated.
I believe policies and procedures should be simple, easy to understand and at the same time be able to address potential risks that a company or country may face.
The idea of sound internal controls is a global issue and debates on how best a company can have the best internal controls is on-going.
In United States, they have the Sarbanes-Oxley Act of 2002 which addresses internal controls and related corporate governance issues.
Those wanting to know more about how damaging weak internal controls can be to the company, they can search for the Enron scandal online and the 2010 BP oil leak. The two case studies show the criticality of sound controls for companies.
In Zimbabwe, most big companies do have good internal controls as opposed to smaller ones but my view is that these internal controls should be constantly evaluated to cater for the rapidly changing business environment. We simply have to keep up with the pace or surprises will hit us.
Remember, internal controls can only minimise risks and not everything will be perfect but overally, companies with sound internal controls always perform better.
◆ Taurai Changwa is an Articled Accounted and ACCA finalist. He is managing director of SAFIC Consultancy. He writes in his personal capacity and can be contacted at [email protected], Facebook page SAFIC Consultancy, and WhatsApp number 0772374784.
