Does your company have an effective internal control program?
The purpose of internal controls is to provide accurate financial information for compliance and management reporting. As with any business process, you should evaluate internal controls from a risk-cost-benefit perspective.
But, for small and mid-sized businesses, safeguarding business assets with internal controls can be challenging—especially when segregation of duties is difficult due to limited resources.
In this article, we’ll walk through the key steps of an internal control risk assessment, share the best practices to improve safeguards, and explore how expert guidance can help you close gaps before they become major issues.
Why You Need Internal Control Risk Assessment (And How to Do It Right)
Control gaps can lead to inaccurate financial statements, compliance issues, or hidden liabilities that lower valuation. Strong internal controls are key to protecting your business assets and maintaining operational efficiency, financial accuracy, and long-term organizational stability.
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One way to identify and address potential weaknesses before they become costly problems is through an internal control risk assessment. It is a process designed to evaluate how well your existing controls protect your business from errors, fraud, and inefficiencies. It ensures that financial data is accurate, assets are secure, and the company meets its objectives effectively.
Key Steps in an Internal Control Risk Assessment
1. Identify Risks
Businesses face various risks, including financial misstatements, internal and external fraud, regulatory violations, and operational inefficiencies. The first step in strengthening internal controls is recognizing potential threats that could impact your financial integrity and business continuity.
2. Assess Risks
Once you identify risks, you must evaluate them based on their likelihood and potential impact. This step helps prioritize which areas require immediate attention and resources.
3. Evaluate Existing Controls
Review current processes and policies to determine whether they effectively mitigate risks. Are financial transactions properly recorded? Are there safeguards against fraud? Are compliance requirements being met?
4. Develop and Implement Controls
If you find gaps in your existing controls, create new policies and procedures to address them. This could involve updating financial oversight measures, improving segregation of duties, or adopting stronger cybersecurity protocols.
5. Monitor and Adjust Controls
Internal controls should be regularly reviewed and refined. Ongoing monitoring, including periodic audits and performance reviews, ensures that controls remain effective as the business grows and regulatory requirements evolve.
Conducting a thorough internal control risk assessment takes time and expertise. If you want a comprehensive evaluation of your controls and actionable recommendations to strengthen them, NYC Advisors can handle the assessment for you.
After completing the assessment, applying best practices helps ensure your internal controls remain effective as your business evolves.
Best Practices to Improve Internal Controls for Small to Mid-Sized Businesses
Strong internal control for small businesses reduces risks, improves efficiency, and guarantees policy compliance. Below are key practices that strengthen internal processes and protect business integrity.
1. Segregation of Duties
No single employee should have complete control over any of your critical business processes. For example, the person approving vendor payments should not be the same person handling supplier contracts. Separating duties helps prevent mistakes and reduces the risk of fraud.
This practice sees to it that multiple individuals verify financial and operational activities, creating a system of checks and balances. It also enhances accuracy by distributing responsibilities among different team members, making it easier to detect errors or irregularities.
2. Standardized Operating Procedures (SOPs)
Clear, standardized operating procedures help your team maintain consistency and follow company policies. When employees know exactly how to handle tasks like purchasing, inventory tracking, or onboarding new hires, they can work more efficiently and avoid common mistakes.
As your company grows, updating these guidelines makes sure that new employees can quickly adapt without disrupting workflows.
3. Regular Reviews and Reconciliations
Numbers don’t always add up ideally, which is why regular reviews are important. Early detection gives you time to make corrections, whether it’s an accounting error or an operational inefficiency.
These reviews also provide valuable insights into business trends. By tracking financial reports, transaction records, and performance metrics, you can make better decisions and keep your operations running smoothly.
4. Monitoring of Internal Controls
Internal controls are the rules and processes that protect a company’s financial integrity. They help prevent fraud, promote accountability, and support compliance with laws and policies.
But having controls in place isn’t enough. You need to monitor them. This is where risk-based internal audits play a crucial part in risk management. Regular internal audits help ensure compliance with corporate policies and industry regulations, reduce financial risks and IT security vulnerabilities, and optimize operational efficiency.
5. Documentation and Record-Keeping
Keeping well-organized records helps you track important business decisions. Recording approvals, procedural changes, and key financial decisions make it easier to track past actions and understand why certain choices were made.
Good record-keeping also streamlines tax reporting, financial planning, and audits. When you can quickly access accurate data, you’ll make smarter business decisions with confidence.
6. Strict Access Controls
To safeguard business assets with internal controls, access to critical systems and data should be limited to authorized personnel. This includes controls over physical security (facility access), logical security (user authentication, encryption), data backups, disaster recovery, and incident response.
You should also integrate access restrictions into the System Development Life Cycle (SDLC) to minimize vulnerabilities and enforce Segregation of Duties (SOD) to prevent excessive control over sensitive processes.
7. Compensating Controls
Internal control for small businesses sometimes requires creative solutions when resources are limited, but that doesn’t mean you’re out of options. When staffing or budget constraints prevent certain safeguards, compensating controls—like leadership oversight or multi-step approval processes—can help fill the gaps.
These additional checks and balances ensure that critical processes remain protected. While they may not replace primary controls, they offer an extra layer of security that helps keep your business running smoothly.
8. Monitor for Warning Signs
Even with strong controls in place, it’s important to stay alert to potential risks. Operational bottlenecks, inconsistent financial reporting, and repeated policy violations can all be signs of underlying weaknesses.
Catching these issues early can save you from bigger headaches down the road. By keeping an eye on key performance indicators and investigating unusual patterns, you can address problems before they lead to costly mistakes.
9. Effective Communication and Training
Internal controls only work if your employees understand them. Regular training sessions help your team recognize risks, follow proper procedures, and take proactive steps to protect the business.
Encouraging open conversations about risks also fosters a culture of accountability. When everyone understands their role in maintaining strong controls, your entire operation is strengthened.
10. Use of Technology
Automation can take a lot of the burden off your team while reducing errors. Digital tools like automated approval workflows, cybersecurity protections, and performance-tracking software help streamline operations and increase transparency.
No control system is perfect, and maintaining strong internal controls is an ongoing effort. With these practices in place, you can reduce risks and improve oversight. But sometimes, even with strong internal controls in place, gaps can still exist. That’s where a fresh, experienced perspective can help.
How Expert Advisors Can Guide You in Improving Internal Controls
Expert advisors help assess your internal controls, identifying gaps and inefficiencies that may not be immediately visible. With an objective approach, they provide insights into areas that need reinforcement and recommend practical solutions tailored to your business.
At NYC Advisors, we take a hands-on approach to strengthening internal controls for small to mid-sized businesses. Our Senior Internal Controls Advisor, Joseph Zarkowski, can guide you through an internal control risk assessment, helping you spot potential vulnerabilities before they turn into major issues.
Case Study: Enhancing internal controls for stronger Corporate Governance
One of Joe’s recent clients, a furniture retailer, was experiencing strong growth through both organic sales and strategic acquisitions. But, their internal controls had not kept pace with this expansion.
For years, the founder relied on a small, long-tenured accounting team to handle bookkeeping, payroll, and financial reporting with little oversight. As second-generation family members took a more active role, they recognized the need for stronger corporate governance.
Joe worked closely with the company to strengthen their internal controls and reduce financial risk.
Challenges Identified
During an initial consultation, we met with the founder and newly engaged family members to understand their concerns. Key issues included:
- Assessing the company’s governance structure (current state versus the future state) to support its rapid growth.
- Integrating two recent acquisitions while preparing for future M&A activity.
- Upgrading to a more robust technology platform.
- Addressing the lack of written policies, procedures, and defined internal controls.
- Responding to concerns about financial oversight, heightened by a recent high-profile accounting fraud case in their industry.
Our Approach
Joe led the engagement with a structured, multi-phase plan to establish a strong internal control framework:
Phase 1: Internal Control Risk Assessment (ICRA)
We began with an in-depth evaluation of the company’s critical business processes. This involved conducting walkthroughs with key process owners to document the current state of operations. Our assessment included:
- Mapping current state (process and controls).
- Identifying internal control gaps.
- Developing a risk control matrix to rank vulnerabilities.
- Providing recommendations to remediate deficiencies and improve processes.
Phase 2: Control Gap Remediation
After completing the assessment, we partnered with management to strengthen internal controls by:
- Implementing technology-driven solutions to streamline operations.
- Introducing compensating controls where necessary to mitigate risks.
Phase 3: Ongoing Monitoring and Improvement
To support continued governance improvements, we established a structured monitoring plan, which included:
- Performing risk-based internal audits to identify and address emerging issues.
- Providing continuous recommendations for process improvements.
- Supporting the company’s growth strategy by reinforcing its internal control framework.
With these safeguards in place, the company is now better equipped to scale its operations confidently, knowing its internal controls can support both current and future growth.
The right experts make all the difference. Advisors with deep experience in governance, acquisitions, and financial oversight help businesses reduce risk and build a stronger foundation for long-term success.
Strong internal controls do more than just keep things in order—they improve financial reporting, prevent fraud, and help ensure compliance with regulations. When your business has the proper safeguards in place, you reduce risks and set yourself up for long-term stability.
If you’re looking for expert guidance in strengthening your internal controls, NYC Advisors is here to help. Contact us today and take the first step toward a more secure and efficient business.
