Revolutionizing Internal Controls Through Automation
Key takeaways
Internal controls are policies and procedures effected by the board of directors, management, or stakeholders to maintain the integrity of information to prevent damage or loss.
Internal control automation is the process of using AI, RPA, and other innovative technologies to optimize and automate processes to ensure that they are compliant with the industry standards, and mitigate risks.
Both manual and automated internal controls are necessary for optimizing organizational operations, however, automation is more beneficial in terms of efficiency and consistency.
- Benefits of internal control automation – compliance with legal and regulatory industry standards, rules-based forms and automated approvals, cost control, transparency and visibility, reduced employee turnover, and better risk mitigation.
What are internal controls?
Internal controls are general policies and procedures companies follow to help them safeguard themselves from irregularities, damage, or loss. Internal controls can be preventive, detective, and corrective. Internal controls in finance help auditors perform tests during audits to gain assurance that the business operations are functioning properly.
Table of Contents
What is internal control automation?
Preventive controls
focus on preventing adverse events, including authorization, segregation of duties, and backing up server files.
Detective controls
focus on detecting errors and irregularities in the company’s financial operations- Eg. internal audits, reconciliation, inventory assessment, and financial reporting.
Corrective control
implements corrections to the deficiencies identified by the detective controls. This includes software patches, new policies, independent reviews, and disciplinary actions.
Examples of automated internal controls:
- Automated workflows that delegate tasks automatically: when the amount exceeds the authorized limit the workflow moves to the senior approval reducing the risk of poor financial practice.
- Automated online forms: data collection with drag-down lists rather than free text boxes for a more standardized way.
- Having a control library to store control data reduces risks and can be securely imported from one source to another using built-in frameworks.
Internal control automation
Internal control automation is a definitive approach where companies utilize technology such as AI, RPA, and other automation tools to optimize and automate processes to ensure that they are compliant with industry standards, mitigate risks, and prevent fraud.
Automating internal controls is essential to strengthen their business operations as it is one of the important facets of digital transformation. Internal control automation helps establish a standardized framework for all the business processes safeguarding against unpredictable losses and risks.
Manual Internal Controls
The truth is that internal controls will require a combination of both manual and automated controls depending on certain factors – cost, objective, available data, and internal resources. However, automation is still beneficial in many ways where manual internal control is lacking.
Manual controls require human action, for instance, validating visitor’s credentials before giving them physical access. Manual internal controls are suitable for situations that require more judgment and discretion.
Pros and cons of manual internal controls
| Pros | Cons |
|---|---|
| Helps with monitoring automated internal controls | Vulnerable to human error and can be easily revoked |
| Allows for comprehensive judgment and more refinement | Difficult to maintain consistency compared to automated controls |
| Professional skepticism and critical assessment allow for better evaluation | Is more vulnerable to the risk of fraud and collusion |
Need For Automating Internal Controls
Internal controls are the pillars that facilitate your company’s compliance which can be designed in different ways depending on your organization.
Though you need manual internal controls, it is best to automate internal controls as it is consistent and more efficient. To overcome the manual internal control challenges the processes need to be digitally automated. This facilitates internal controls to be built into the system in ways that cannot be bypassed easily.
There are several benefits to automating internal controls that strengthen a company’s operations.
Benefits of Internal Controls Automation
Compliance with legal and regulatory industry standards
The present dynamic business environment calls for optimizing control procedures with automation and other technologies due to the increasing pressure from compliance authorities, regulatory requirements, and other factors.
There are several compliance standards such as GDPR, Information Security, CCPA, and Sarbanes-Oxley Compliance. Businesses must operate in compliance with these standards. To do this, businesses need to test critical internal controls through sampling approaches. Having an automated system like Cflow can effectively help in establishing an internal control framework.
Process automation with rules-based forms
Process automation is highly effective in optimizing internal control. Process automation software like Cflow offers automated online forms that can be customized to collect information in a standardized format.
For instance, Cflow has a predefined automated form for Capex requests which the finance teams can import and use easily. The form is completely customizable with a drag-and-drop interface where the finance team can edit the required fields and fill out the information.
Once completed, the workflows can be automatically routed which establishes internal controls immediately when the workflow is initiated. If the Capex request has to be sent to a higher level for approval automation ensures it happens. This eliminates the need for manual and standard methods such as emails, phone, and messaging. This improves overall efficiency and strengthens automated internal control.
Cost control
The control processes have to be developed, deployed, tested, and audited which comes with a price for the organization. The operational cost of the internal control process should not exceed the benefits that it provides.
Having an efficient automated system can help businesses build a cost-effective control environment and reduce redundancy and negligence due to manual internal controls. This streamlines operations by improving delivery timeliness and accuracy of data.
Internal control automation benefits audits by reducing compliance expenditures. It provides long-lasting effects by minimizing manpower costs and eliminating time-consuming processes such as reconciling data from different sources, manual journal entries, etc.
Transparency and visibility
Certain business operations require complex workflows involving multiple levels of approvals and communication which becomes difficult to keep track of.
Automated workflows offer real-time visibility over the specific process and all information gets stored in a centralized platform with the help of feedback from the stakeholders. This makes internal control transparent and businesses can easily identify bottlenecks that can be improved over time.
Better risk mitigation and fraud prevention
Automated internal controls create better preventive controls. It helps detect unauthorized access, and illegal data entry, encrypt data with an extra layer of protection from third-party access, and role-based permission controls, and develop a proactive risk management system.
Reduced employee turnover rates
Internal control automation reduces employee turnover by familiarizing employees with internal controls which improves employee morale. Employee departures weaken internal controls as the expertise of a valued employee is not easy to replace.
Automated processes can prevent employee turnover with their pre-built off-boarding controls that restrict employee exit and help mitigate the risks associated with employee turnover.
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How to Automate Internal Controls?
Automating internal controls generally involves two data – master data and business process data. Master data is the core all-inclusive data that is critical for business operations. This is shared across the enterprise and multiple departments for decision-making. For eg. vendor master data, material master data, and payroll master data.
Business process data represents the data generated through the activities performed within an organization to achieve business objectives. For eg. purchase order data, CRM data, and financial reporting data.
In addition to these there are other types of data but internal controls automation focuses on ensuring data integrity, accuracy, and reliability. It administers data to avoid accounting errors, inaccuracies, inconsistencies, and frauds and enhances control over critical data assets.
Internal controls automation facilitates companies to use data to perform automated fraud checks, operate business transactions in real-time, set up automated workflows in real-time, and resolve issues before risk spreads and affects critical business operations.
Here are the steps involved in automating internal controls:
- Automating internal controls begins with identifying the necessary processes that need to be automated and that align with organizational objectives.
- Automate in smaller steps by choosing a particular use case with high value at a time which is easy to implement.
- Observe shortcomings in the existing controls and processes and identify possible areas of improvement.
- Identify which controls need testing with automation. For instance, in a loan process, customers can be informed about their approvals through automated notifications instead of treads of emails.
- Create and maintain a database where all the testing outcomes are documented and stored for continuous improvement in the future and also for audit inspections.
How Cflow Can Help
Cflow eliminated the paper-based CapEx requests with its robust automaton for NutriAsia, a renowned food company in the Philippines. The rapid business growth resulted in an increased number of HR and CapEx requests which became difficult to handle manually.
Moreover, Nutriasia wanted to complement their existing supply chain management on SAP and was looking for a robust automation tool that seamlessly integrate with SAP and be imperative in optimizing their CapEx requests. With Cflow’s AI-powered workflow automation, a series of workflows were quickly automated which replaced the work of a hundred spreadsheets within minutes.
When NutriAsia’s processes were automated, it significantly reduced the data entry time, eliminated manual paper flow, and ensured consistency resulting in a paperless environment that improved overall operational efficiency and boosted employee productivity.
Conclusion
According to a survey by Deloitte companies that had automated 50% and 75% of their financial controls reported no significant deficiencies or material weaknesses which indicates a compelling case in favor of increasing automation.
Technological advancements are forcing companies to invest in smart automation solutions. Automation combines the skills of people and processes, optimizes business operations, and safeguards businesses from financial risks and compliance breaches. For this, businesses need to have the right automation software. That’s why it is essential to choose Cflow!
Cflow is an AI-powered workflow automation software that is designed to strengthen your business’s internal controls. Talk to our experts by signing up for a free demo today!
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