This 2017 looking towards an efficient and effective system
Text: Ajay Balasubramanian Illustration: Jithin Mohan
As a state with highly-skilled manpower, knowledge enriched economy and encouraging policies, Kerala is emerging as an entrepreneurial state. There has been a vigorous growth in the Small and Medium Enterprises (SME’s) sector over the last few years and Kerala too has been witnessing budding entrepreneurs with promising new start-ups. With the relaxation of listing requirements for Small and Medium Enterprises, partnering with large industries in providing complementary businesses, SME sector has begun to gain visibility in the national and global mark. By 2020 SME’s contribution to the nation’s GDP is expected to increase from 17% presently to 22%.
Why invest in Internal Control System (ICS)?
Investing in an internal control system is often regarded as an added investment by most small and medium companies. The weaknesses in internal controls get reflected in financials by way of noncompliance to laws and regulations, errors, frauds or mismanagement. So having an effective internal control system must be the backbone of every organisation. Internal control encompasses the policies, processes, tasks, behaviours and other aspects of a company, therefore, all together facilitating its effective and efficient operations to respond appropriately towards significant business, operational & financial compliance and other risks in achieving the organisation’s objectives. The common misconception is – “Internal controls are effective and beneficial only to large business firms”. Also, proprietary business concerns having direct monitoring despise the internal control system with the much relatable defence – “We have been in the business for generations, we have not felt the need for internal controls yet”. However, every business faces a weakness in its process at some situation which can be addressed by enforcing effective and efficient internal controls.
Why do we say ICS is mandatory?
From our intensive research, we have seen that a small & medium business particularly is subject to fraudulent schemes, scams, employee misappropriation, pilferage, worker crimes, and theft. Even a relatively small business handles a lot of money, holds valuable assets, and deals with markets. Thus as a protection against these threats, the SME’s must place internal controls appropriately and enforce it effectively. Owners/managers who hold the key to arresting internal control failures should be made familiarised to the concept and issues of internal controls. As a result maximising the business potential and minimising the risk of fraud, error and loss.
Compliance of Internal Financial Controls
The biggest corporate scam by Satyam Computers that rocked the nation in 2009 was an eye opener for Indian regulatory bodies. In this while, more than half a decade after the fiasco there has been a significant emphasis by Government agencies in implementing regulations to check on the internal controls and accounting systems. The most important step taken by regulatory bodies is the introduction of “Internal Financial Controls” as laid in the new Companies Act 2013. attention to internal controls affecting the financials which was overlooked largely among the SME’s due to lack of awareness.
2017 & Looking ahead
Owing to the growth in the economy along with the booming start-ups, and soon coming up Governance reforms; it will be an imperative step to give more emphasis in implementing Internal Financial Controls framework in line with the Company’s Act requirements, this 2017. The fruits enjoyed by the companies will not be restricted to regulatory compliance alone but will also gain the opportunity to benchmark internal controls against the leading industry practices. Effective internal control reduces the risk of asset loss and helps to ensure that the financial statements are complete, accurate and reliable.
Further suggesting on how to leverage on existing control framework, the best approach for companies should be to link their Internal Audit plan with the IFC programme. This will require adequate skill sets and time commitment from the Internal Audit team for documentation, controls assessment and automation, and testing of controls. Most often when new laws and regulations come into force, they are viewed as an added exercise for accounting and finance teams. Like every large organisation, it is critical for all the small & medium business CFOs to understand how their organisation’s mission, vision, and strategic goals can be successfully achieved if they understand the risk management and how risk planning affects each of these foundational areas. This is important for organisations of all sizes and across all business models.
Concluding with confidence
All internal controls, whether administrative or accounting, are linked to a financial consequence. Hence Business owners should look critically at their business and examine whether their procedures adequately minimise risks and promote best practice within the firm. The SME business has limited resources, and the owner must be active and vigilant to protect the resources. Good internal controls will not only help manage resources but also make sure that the operations are efficient and effective.
Ajay Balasubramanian is a qualified Chartered Accountant by profession. He started his career as apprentice at the age of 17. He has 8+ years of experience in Risk Assessment Reviews, Audits, and Management Advisory Services in wide spectrum of industries across India and Middle East. He has been instrumental in deploying pricing strategies and performing Process Re-engineering in Power and Utilities sector. He is a self-motivated, ambitious person who loves to take up challenges. He worked as a Senior Consultant in Big 4 for more than 2 years before starting his own firm ADVYSIO CONSULTING. ADVYSIO CONSULTING provides tailor made business restructuring, process re-engineering and implementing Internal Controls evidencing positive changes to business. He enjoys reading, watching true life inspired movies, writing blogs and exploring places.
Internal controls help the owners achieve the following:
- Help align objectives of the business
- Safeguard assets
- Ensure proper financial reporting
- Prevent and detect fraud and error
- Reduce exposure to risks
- Encourage good management
- Allow action to be taken against undesirable performance