Using Process Automation for Internal Controls
By Mike Raia Posted November 18, 2021
Finance operations are being transformed by process automation in numerous ways. One of the most important facets of this transformation is in the area of internal controls. Modern finance teams can now strengthen their internal controls with automation, enabling them to enforce a standardized framework for all their processes. This allows the internal controls to function as intended-- as safeguards against financial risks and losses.
To understand this shift, we need to answer a few questions. What exactly do we mean by internal controls? What are the challenges in maintaining a system of controls? How can automation be used to enforce internal controls? And what are the overall benefits of automated controls for finance teams? We address these questions below.
What are Internal Controls?
Internal controls can generally be understood as policies and procedures that are operative within the company and create safeguards against damage or loss. For finance operations, internal controls are critical for maintaining financial wellbeing and regulatory compliance. The three main types of internal controls are detective, preventative and corrective.
Detective controls are meant to detect any errors or irregularities in finance operations after they have occurred. They can identify missing assets, as well as detect errors or inconsistencies in transactions. Examples include reconciliation, internal audits, inventory assessments, and financial reporting.
Preventative controls are intended to prevent adverse events from occurring in the first place. Such controls include authorization requirements, segregation of duties, and backups of server files.
Corrective controls are implemented to correct any deficiencies found by detective controls. They can include new policies, software patches, disciplinary action, or independent reviews.
All of these controls need to be implemented consistently to be effective. Unfortunately, any framework of internal controls will face some common challenges.
Challenges with Internal Controls
A system of internal controls will tend to face the ongoing challenge of human error and fraud. This is especially true when manual processes are in place. There is constant potential for irregularities with manual processes; there is also a lack of transparency into finance operations from a high-level perspective.
Internal controls can also reduce efficiency. If a control slows down the natural flow too much, it may not be worthwhile to implement or enforce. For every internal control, a finance team needs to balance efficiency with risk reduction.
The reduction of speed and efficiency by internal controls can lead to another issue --- employees cutting corners. If an employee feels pressure to complete tasks faster, they may circumvent the control. This increases the risk for the finance team and undercuts the purpose of implementing the internal control in the first place.
Impact of Process Automation on Internal Controls
The everyday challenges of internal controls listed above are increased drastically with manual processes. When processes are digitally automated, internal controls can be built into the system in ways that cannot be bypassed. Just as significantly, process automation will increase speed and efficiency to the extent that the internal controls will no longer hinder streamlined operations.
There are several main areas where process automation will strengthen internal controls in finance operations.
Rules-Based Forms and Process Routing
For most finance processes, two key components are the collection of information and the routing of workflows. Consider some standard processes in finance operations, such as invoice approvals or capital expenditure (CapEx) requests. These processes will need information to be collected that is critical to the decision-making process. Then those processes, which typically require several layers of review and approval, will need to be routed through the appropriate personnel. So how can automation help?
Automated online forms can be used to gather information in a standardized format. Finance teams can use such features as required fields and dropdown menus to ensure no essential information is missing or filled out incorrectly. Accordingly, internal controls can be enforced at the initiation of the process.
When the workflow routing is also automated, additional internal controls are easily brought into play. If an invoice approval or CapEx request has to be directed to a higher level above a specific dollar amount, for example, the automated system can ensure it happens. And without needing to rely on the standard methods of non-automated processes (emails, phone calls, messaging, etc.), the overall efficiency of the process will increase while the internal controls are strengthened.
Real-Time Visibility and Transparency
With many finance processes requiring complex workflows and multiple levels of review and approval, it is often difficult to determine the status of any particular action. Automated workflows allow for real-time visibility into a process by providing a centralized platform where any stakeholder can determine who is involved and any steps remaining. In this way, bottlenecks are more easily identified, and processes can be refined over time.
Decreased Risk from Employee Turnover
Employee turnover poses its own challenges to the internal controls of a finance team. When employees are familiar with enforcing internal controls, any particular employee’s departure increases the risk of mistakes and internal controls not being followed. Fortunately, an automated process with built-in controls for offboarding can mitigate or eliminate this risk.
Auditing with Process Automation
For its internal controls to be successful, a finance team must also effectively complete audits of its activities. Whether it is an internal audit or a response to a regulatory agency, one of the primary purposes of controls is to make these audits easy to comply with.
Process automation fulfills a critical role here. With workflow automation, audits of activities and events are drastically streamlined. Audit trails are effectively self-generating since every step in the process is automatically recorded on a centralized platform—no more sifting through emails, spreadsheets, or documents from different sources. The audit trail can identify every participant in the process and the actions taken, along with the date and time stamps.
Strengthen Your Internal Control Framework with Process Automation
With the right workflow automation software in place, the internal controls of your finance operations can be maintained and strengthened. By providing a framework for all processes, an automated platform can ensure your controls act as the safeguards they need to be. Instead of skimping on control enforcement in the service of speed, your finance team can increase efficiency and accuracy, with its internal controls becoming airtight.
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