Why businesses need internal controls

Tofazzul Hussain   | Published: January 05, 2019 21:19:29 | Updated: January 08, 2019 21:08:57

To remain healthy on personal level, we have to control our lifestyle. We know that a family prospers because of controls by the guardian. Similarly, for a business to succeed there must be some kinds of controls. From sociological viewpoint, wherever people are involved, they need to follow some rules. 

To avert business failure, we must adopt a culture of good governance in standardised control systems.  There are many studies in this regard.  According to McMahon and Ivancevich, the word 'organisation' implies control.  Allen Robert Tannenbaumc-- an American/Israeli researcher on robust control with the solution of the gain margin and phase margin problems, also an award winner from American Automatic Control Council-- claims that an organisation without some form of control is impossible.

Business success hinges on robust internal control systems of the business organisation that safeguard the business from internal and external threats.

A control system is defined as the constantly done interactions within the company aiming at correcting inefficiencies to promote and sustain the efficient business processes run by ethically strong people.  For a company's internal control system and corporate governance, there are sources of prescribed control systems, such as: The Companies Act 1994 via the Memorandum and Articles of Association of a company; corporate governance guidelines of Bangladesh Securities and Exchange Commission (BSEC) based on OECD (Organisation for Economic Cooperation and Development) and COSO (Committee of Sponsoring Organizations of the Treadway Commission) framework; Bangladesh Bank's guidelines on internal credit risk rating systems for banks, NGO Affairs Bureau's internal control guidelines and the Institute of Chartered Accountants of Bangladesh (ICAB)'s audit standards to assess the control system of a company.

The essence of all guidelines is that control system is not a mechanical process; it is mainly intellectual.  It is to be constantly monitored.  Everybody in business has their own interests.  Agency costs, distrust, market competition, unmotivated people, free-riding problem, government regulations etc. are within and outside the boundaries of a company's business.  A robust control system can blend those interests for business success keeping all parties happy in the process.  The control system can be a deterrent to undue opportunistic behaviour.  It can act as a disciplining device.

Darwin (1871) observed that the struggle between two organisations was as active as they were analogous.  Therefore, there is a tremendous opportunity of cooperation between the parties at opposite poles in a company.  Since Darwin pointed out that organisations prosper more when they differ more, both the differing parties can reap benefits by being different but blended in a functional internal control system. 

Generally, a company has some good sides as well as less than good sides.  On less than good sides, a company tends to be disorganised, lack operating procedures (key strength of a business), and be highly geared where debt service is almost a daily concern and cost of finance is too high to yield any return for the shareholders.  In such a company, daily cash transactions are prevalent in a lifeless work environment where absence of standardised operating procedures and management information system (MIS) and non-compliances with salient business regulations drag its business on the verge of collapse.  This sorry state can easily be averted by installing a business control system focusing on the following areas: corporate culture; business documentations; goals, primary aims and vision; organisation structure and human resources management strategy; internal control system and financial reporting progress; management information system (MIS); and sales and marketing strategy.

These warrant immediate attention of the owner and management of the company for profitability and business perpetuity by maintaining key processes of a business.

Tofazzul Hussain FCA, CMC is Lead Consultant and Chairman of HUSSAINS Business Consultants Limited, a business and tax advisory firm. 







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