The concept of internal control and its importance in an organization : SAB Kuwait

The concept of internal control and its importance in an organization : SAB Kuwait


1. Introduction:

         Nowadays, economic institutions and organizations are rapidly and continuously evolving in various economic, social and environmental fields because they are characterized by a constantly changing environment. Thus, their success depends primarily on their ability to adapt and cope with the rapid changes and new situations that arise so that they can work efficiently and effectively to achieve their desired goals and be able to effectively manage the risks faced by them.

         Companies such as Nokia and Blackberry that were previously global and vibrant have become unable to continue in the labor markets because of their inability to keep abreast of modern developments and adapt to changing circumstances, which led to the emergence of new companies such as iPhone and Samsung that compete with the same strategies and objectives.

         In addition, accounting scandals such as fraud and bribery have led to the bankruptcy of many companies due to their violation of corporate rules, regulations and accounting laws. This in turn, will result in lack of confidence in the company’s board of directors, regulatory departments and accounting systems used by them. It also affects the extent of the shareholders desire to invest in these companies. On September 15, 2008, Lehman Brothers filed for bankruptcy, with $639 billion in assets and $619 billion in debt. Lehman’s bankruptcy filing was the largest in history, as its assets far surpassed those of previous bankrupt giants such as WorldCom and Enron.

         And the fact that most companies are prone to make mistakes that were mentioned above, they are now increasing their internal audit processes especially since the existence of an effective internal audit leads to increase investors’ confidence in the company. Thus, it can be said that internal auditing serves as the basic building block for companies and organizations who wants to direct operations towards success to achieve stability and profitability in them.

2. Nature and concept of internal control:

         There is no doubt that the internal control division is considered one of the most vital division in any organization because it has an important and effective role in evaluating the strengths and weaknesses of the company’s departments and serves as their backbone.

         The concept “Canadian Institute of Certified Public Accountants” has defined internal control as “a set of activities aimed at improving day-to-day operations within the institution and adding value to asset protection and ensuring the accuracy of accounting data”.

         While the Association of Chartered Certified Accountants (ACCA) defines internal control as a “consultative activity that assists the institution in achieving its strategic objectives, this activity includes the examination, evaluation and control of the effectiveness of internal accounting and control systems.”

         The institute of Internal Auditors (IIA) defines internal control as “a set of actions that help the organization achieve its intended objectives by developing an orderly and disciplined approach to assess and improve the effectiveness of risk management processes and to implement corporate governance principles.”

         In general, internal control can be defined as an organizational process and procedures that are affected by the management and personnel of the entity, built to deal with unit risk and to protect assets for the purpose of achieving preventive control and to provide reasonable assurance that the internal control objectives have been met. In order to maximize transparency and achieve the principle of independence in internal auditing, internal auditors are appointed by the audited institution.

3. Internal control objectives:

Internal audit has received considerable attention from financial auditors and the administrations of economic institutions for a long time.  The complexity of the business makes the management depend primarily on the reports of the internal control unit and the analysis in these reports.

         The primary objectives of the internal control systems in government organizations are as follows:

  • To ensure the implementation of operations efficiently and effectively:

            One of the most important objectives of the internal control system is to monitor government’s spending efficiently and effectively in a way that would not affect the quality of the work and services on which the government organizations.

  • Protect resources from loss, damage and misuse:

            The controls imposed on the resources of government units help protect assets from loss, damage and misuse so they can be fully utilized to achieve the objectives of government organizations.

  • Providing accurate information based on accounting reports to achieve effective accountability:

            The accuracy and quality of the information provided in the accounting reports reflects the performance and effectiveness of the institutions because it fully helps the stakeholders to monitor the performance as well as to improve the financial and operational performance of the institution.

  • Compliance with regulations, policies and instructions:

It is verified that the policies and regulations imposed on the entity are followed. This is also related to the regulations and policies set by the administration.

To achieve the above objectives, the internal auditor must comply with certain conditions such as:

  • Separation of tasks assigned to the internal auditor (Segregation of duties).
  • Control and free access to records and documents.
  • Identify the authorities responsible to manage resources.
  • The adequacy of supervision and auditing.

4. Conclusion:

            In conclusion, internal control is a set of rules and procedures that improve the performance of the organization and achieve its desired objectives to reach the highest attainable level. It is considered one of the most important control systems in institutions and organizations because of its key role in protecting the property of the institution from manipulation, fraud and error.

         Internal audits add value to the company through promoting corporate governance and providing information to the management on the extent of compliance with the rules, instructions and regulations, evaluation of the internal control system, assessment of risk management, and the company’s compliance with the principles of corporate governance.

References:

English references:

1.Bubilek, Olga, (2017), Importance of Internal Audit and Internal Control in an organization.

  1. Al-Matari, E. M., & Al-Swidi, A. K., &Fadzil, F, H. The Effect of the Internal Audit and Firm Performance: A Proposed Research Framework. International Review of Management and Marketing, 4(2014), 1st ser., 34-41.
  2. International Professional Practices Framework (IPPF), The Institute of Internal Auditors Research Foundation. Florida, USA, January 2011.




Leave a Reply