The Private Company Guide to Effective Internal Controls


Deloitte’s three-part series explores the potential benefits your business can derive from risk assessment, effective internal control design, and regular monitoring.

Public and private companies are subject to different regulatory requirements regarding their financial and operational information, including to whom the information is provided and the level of detail it must contain. Nevertheless, any business can benefit from the availability of transparent financial and operational information for decision-making and reporting to stakeholders.

As the owner, manager or investor of a private company, what can you do to increase your certainty about the information coming to you from across the company?
Whether your business is venture capital backed, privately funded, or a family business, internal controls are an important part of the answer as you grow. They can be an integral part of operations that can help mitigate risk and add business value.

Performing risk assessments
A system of internal controls should be informed by a sufficiently detailed and periodically performed risk assessment that identifies critical processes that are prone to error, thereby potentially creating quantitatively and qualitatively significant risks to your business. A risk assessment can help you determine the impacts your business could suffer if such errors occur and help you focus on the ones that matter most to your business strategy and operations.

A risk assessment helps you think critically and answer questions such as:

  • Who are my stakeholders?
  • What are our main business risks?
  • What information can help us manage identified risks?
  • How susceptible is the information we currently have to errors and how can this affect strategic decisions and governance obligations?
  • What resources do we need to deal with these risks?
  • .

    Once done, it’s time to design and implement the internal controls.

    Deployment of internal controls
    Designing and implementing internal controls is a multi-step process. After performing a risk assessment and identifying specific areas of risk, you should try to get a clear picture of “what could go wrong” in each area, a prerequisite for understanding your business risks and design of effective internal controls.

    Once the risks or areas of risk have been identified, categorized and prioritized, it is important to determine what type of internal controls could best mitigate those risks.that is, preventive or detective, manual or automated. This may vary depending on the assessed level of risk and other factors.

    When implementing controls, do not underestimate the importance of clear and detailed documentation. Control ownersthe people responsible for carrying out the control activities—wwill only be effective if they have a clear understanding of the control-related process and the design of the internal control itself.

    With documented controls in place, it’s time to close the loop on the controls environment by developing an effective monitoring program that can help you maintain, monitor, and streamline controls over time.

    Extend value over time
    An important aspect of a system of internal controls is determining how to maintain their effectiveness and, optimally, improve them over time. A well-designed internal control framework, informed by periodic risk assessments, can make your internal control system agile and scalable. As your business evolves, new risks may be identified and previously identified risks may no longer be relevant.

    A thoughtful and agile internal control framework, focused on key risks, can provide a mechanism to support the strategic direction of your business. It can help drive sustainable value by providing business insights and validating data used to develop financial reports. It may even help make your business more competitive and attractive to suitors in the future, depending on your strategic goals.

    For more information contact:
    Ashok Parmar, Partner
    Deloitte & Touche srl

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