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Internal control systems in consumer products industry
Business operations require internal controls for systematic functioning and efficient
management. Internal control is the process of structuring an organization such that it operates
efficiently and reliably. It strengthens the credibility of an organization by providing ways and
means to abide by the laws and keeping a check on the regulatory compliance. An organization
uilds its control mechanism by a continuous improvement process and drafts clear policies for
eady refe
al of all employees.
The financial success of a firm is contingent on how well it has organized itself and its functions
such as the accounting system, the communication channels and the information technology
solutions. The internal control system provides a view of an organization’s attitude towards
work. With a well-placed control mechanism, the stakeholders are reasonably assured of the
fairness in the transactions of the entity as well as the ethical standards of a company and its
employees.
Internal control mechanisms involve appropriate monitoring or performance evaluation,
communication and information paves way for exchange of information among peers and across
different levels of hierarchy, control activities which help mitigate risk, assessment of risk along
with control activities is an important component and the overall environment of control in
alignment with the organization’s control.
Talking specifically about the financial control system in an organization, most organizations
have an internal audit control system. This is divided into internal audits and internal controls.
Internal audits are nothing but informal reviews done by the business owner or employees
themselves. This provides information on internal operations and employee performance.
Internal controls are a representation of set of specific policies which must be followed by one
and all in the business.
Business owners tailor their systems so as to focus on specific business issues for a lack of
direction may lead to confusion and the entire purpose of control system will be defeated. To be
most effective, control systems should contain clear and well-defined policies for each
department. This provides a framework for operational managers and employees to focus on
proper application the control system policies. If there is a lack of knowledge it becomes difficult
to safeguards to protect business and financial information. In this external consultant’s
knowledge with an expertise in the field can be used. In addition, COSO’s Internal Control –
Integrated Framework guidelines have also helped managers lay out their systems for internal
control and risk mitigation.
To provide a unified set of guidelines for internal controls system in an organization, the
Committee of Sponsoring Organizations of the Treadway Commission (COSO) released their
Internal Control – Integrated Framework in 1992. The original framework was accepted and
eventually became widely used around the world. It is now popularly known as a leading
framework for effective design, implementation as well as evaluation of internal control
mechanism. It has been more than twenty years since the inception of this framework, and these
years have seen the dynamism in the way the businesses operate. They have become demanding
in terms of transparency as well as accountability of the processes of internal control and their
ole in business decisions. With COSO’s framework, firms will be able to achieve its objective.
The framework describes the components of internal control: the control environment, risk
assessment, control activities, information and communication and monitoring activities. In
addition, it also lists the limitations associated with the concept of internal controls. Firstly, they
are laid down at different levels of an organization with different objectives. They give an idea to
the management about the firm’s progress. Additionally, they are not indicators of complete
assurance of a firm achieving its operational, reporting and compliance objectives. The best
outcome that can be expected is that of a reasonable assurance from a system of internal controls
with respect to an entity’s performance. The COSO framework suggests the components can be
implemented as follows:
Control environment: This is adjusted by the Audit Committee as well as the senior management
y keeping a check on the financials and having qualified personnel to take charge of key
positions in an organization. Also, continued training and education of employees keeps the
control environment dynamic to adapt to the changing requirements.
Risk assessment: The Generally Accepted Accounting Principles (GAAP) framework is the base
to be used for reporting. Any external changes could be a risk, and should be assessed
appropriately. Response mechanism should include more stringent internal controls and
awareness of senior management about the issue.
Control activities: Internal staff should be in touch with external auditors to assess the changes
and their applicability to the organization. Professional subscriptions/ material should be updated
for ready use and review by the employees. Checklists should be in place to ensure accuracy and
compliance in the preparation of companies’ reports.
Information and Communication: New information should be disseminated quickly and
appropriately within an organization to facilitate development of controls to take care of
financial and accounting issues.
Monitoring: This is apparently a very important step and often an area where more lax is seen in
the business environment. Any deficiency or insufficiency in the internal control systems or their
implementation should be addressed immediately and the system should remediate it.
Entities specific to a particular industry can be varied in terms of their internal control systems.
Keeping the above mentioned ideas as a base, we see how consumer products companies
develop and organize their systems of internal checks and balances for risk mitigation.
Consumer products industry includes both durable...