It is a well-known fact that business activities are considered to be risky activities. In in the course of its business, an organization is subject to political, legal, financial, technical, and organizational risks. Given the frequency of crises that has been occurring in Ukraine, quite a large number of companies are now working on the principle “We are on the brink. But we don’t break!” According to research, the risk management system within an organization must be applied during the planning stage or else it will require significant improvement. Probably the lack of education of business owners and management in the practical component and “effect on output” plays a role. However, the importance exercising internal control and optimizing business processes within an organization cannot be overestimated. After all, this is “profit that is right under your nose”. As we understand, an internal control system entails the entire range of procedures, methods, and controls generated by the organization in order to properly carry out business transactions. Internal control procedures are an integral part of the organization’s business processes. They are carried out either throughout the whole business process or immediately before or after performing a task. The internal control system helps to do the following:
- ensure the performance of tasks under the organization’s efficient and effective management;
- ensure compliance with legislative and regulatory requirements;
- ensure the safety of assets;
- prevent errors and violations, to identify them and to reduce their number;
- ensure the relevance, accuracy, completeness and correctness of accounting;
- ensure the preparation of timely and accurate financial reporting.
The internal control system can be called a “safety cushion” for a business and its financial accounting, as its objectives include eliminating the distortion of transactions before they are reflected in the accounting, providing the company’s management with reliable information, preventing a decline in profits from such negative phenomena as personnel misusing assets and fraud, the company’s dependence on its management, as well as external risks.
Thus, the importance of this system has been defined. The key issue is to ensure the system’s functioning and, at this point, we have two options: to self diagnose business processes and internal controls (if available), or to assign this task to external experts (consultants).
The process of identifying and eliminating risks mainly boils down to the problem of identifying the relationship between specific actions and their consequences. This problem is resolved and repeated with a detailed description of business processes, making the task of optimizing essential in building the company’s activity and in creating a robust risk management framework. It should be noted that, in making decisions regarding risk management, only experience and competence guarantee a critical way of thinking, as well as the ability to “see” a risk and find a way to eliminate it. Perhaps that is why most companies mainly rely on experts’ experience when it comes to risk assessment and diagnosis processes. Otherwise, the organization faces yet another risk – when undergoing a diagnosis of “their” business processes, key and important risks to the organization are likely to be overlooked, meaning that the control system will ultimately be incomplete and will likely be ineffective.
As a counterweight, involving experts (consultants) in this particular task allows the company to do the following:
- to see a clear picture of how your organization operates, including its departments and business processes;
- to achieve an analysis of how existing processes and the internal control system (if one exists) are functioning properly and how existing corporate requirements are being met;
- to obtain an independent assessment of how business processes are operating, as well as the organization’s control.
Finally, we want to note that, in any case, the decision to implement an internal control system and carry out diagnostics for existing business processes (and their improvement) entails quite a serious positive process. Only the organization’s management can decide which tools to use in order to achieve this – either using their own resources in aims of using “imaginary savings to solve the problem” or involving external and independent experts, who have the necessary knowledge, skills and experience to configure business processes and an effective internal control system. On our own part, we would like to recall that the status of an “expert” in relation to consultants is not used in vain.
Author: Igor Gmyria