A 5-Step Guide to Stronger Internal Controls.

Posted by | August 31, 2022 | Audit Career Trends, Big 4 Accounting firms, Internal Audit, Internal Controls, IT Audit, Latest Audit Information & News, Risk Audit

Audit International recently came across a very interesting article, on improving Internal control systems, in the Wall Street Journal, and thought we’d share it with you.

Increasing business complexity and regulatory requirements are driving continual change to the risk environments for many organizations, and historical approaches to risk and controls may not be suited for the current atmosphere of digital transformation, persistent change, and uncertainty. As the business landscape continues to evolve, the risk of accounting and reporting misstatements rises, often due to the inability to respond to internal and external circumstances and adapt quickly to business changes.

Developing an internal controls framework with upgraded operating models, advanced technology integration, and new processes to monitor, implement, maintain, and optimize a risk and reporting structure can position an internal control program to stay ahead of risk and increase value. First, we will explore some of the internal and external factors driving challenges beyond traditional remediation and restatements in accounting and reporting, including considerations receiving attention from the SEC and AICPA. These critical change drivers, along with internal controls and automation opportunities, inform a new risk and controls framework empowered by more proactive and data-driven solutions.

External Factors Driving Remediation and Restatements

Remediation and restatement drivers include external challenges such as new accounting rules; the SEC and regulatory guidance; and environmental, social, and governance (ESG) reporting. Some of these external drivers were highlighted at the recent AICPA conference and featured prominently in recent SEC comments—including SEC reporting and rulemaking, ESG matters, auditor independence, and digital assets.1 2

Data quality and the importance of modernized reporting supported by new technology were prominent features at the AICPA conference, with an emphasis that organizations evaluate their standards, processes, and technologies to create accurate and easily accessible reports. In addition, responding to market demand for ESG information was a key theme throughout the conference and SEC comments. ESG is the universe of topics that reflect areas of performance management around the impacts and dependencies of the business on society and the environment. It is a dynamic and interactive process that will likely have far-reaching implications for an organization, and the overlap between sustainability and financial reporting is inherent. Still, given the scope and possible market share of ESG activities and resulting data volume, multiple possibilities of future regulatory requirements may cause uncertainty around developing a new reporting framework that can mitigate remediation and restatements and optimize the controls environment.

Internal Controls and Automation Opportunities

Understanding both the external and internal drivers to risk and reporting structures helps inform the structure of a new internal control program to be more resilient, efficient, and agile through a changing risk profile. In addition, developing the new program using a change framework that identifies what to monitor, implement, maintain, and optimize in the controls program implementation may further enable a more resilient and efficient framework.

In addition to the external challenges to remediation, addressing internal challenges and opportunities is also necessary when developing the new control program. Disruptions from new technology and digital transformation are potential examples of prevailing internal challenges that may lead to restatements and remediation. However, the digital transformation also enables opportunities with automation, enhanced analytics, artificial intelligence, and data-driven solutions for the evolving risk and controls landscape and reporting lifecycle.

Automation Opportunities Across the Reporting Lifecycle

Process automation—includes manual, repetitive, rules-based processes and enables transaction automation, dynamic data manipulation, and streamlined communication. Examples include report generation, data reconciliation, and trend tracking.
Shared services process automation—includes processes with multiple interactions across different systems that enable process synergies. Examples include payroll, onboarding, education and training, and IT functions such as infrastructure, directories, and file management.
Outsourcing process automation—can be built for outsourcing contracts using robotic process automation (RPA) solutions. Examples include reconciliations, claims processing, inventory processing, production support, and network monitoring.
Developing a New Internal Controls Program

This five-step guide to developing a new internal controls framework can be considered to help address the external and internal challenges and utilize automation and data-driven solutions to move a control program forward and reduce the chances of accounting and reporting remediation throughout the transformation.

Conduct dynamic risk assessment and scoping updates that are periodically refreshed to remain agile, identify fraud risk considerations, and create a communication plan.
Develop internal control program methodologies, update operating models, and ascertain control owners and operators, including areas to automate.
Introduce technology to help automate and monitor the control environment and obtain electronic evidence with data and analytics.
Establish automated control methodology, develop a digital testing approach to control automation, and evaluate and update protocols for data security and cybersecurity.
Lead with the process, data, and user experience, all enabled by advanced analytics, data visuals, automation, and intelligent technology integrated within the framework.
Potential Benefits of an Updated Control Framework

Using remediation and restatement drivers to create a modernized controls framework may offer benefits beyond mitigation of risks in controls reporting. Developing a framework for a changing risk profile built on a foundation of new technology elevates the quality of reporting by increasing transparency and visibility into business processes with meaningful insights into managing risks. These deeper insights allow the function to refocus efforts and move away from point-in-time solutions to address issues continuously with more transparent monitoring and visualization capabilities.

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