What Are Financial Controls?

Mary McMahon

Financial controls increase efficiency, regulatory compliance, and profits for a company or organization. They determine how and where assets are allocated, and provide a means for intervening when the organization is not operating effectively. Some are implemented internally as part of a business plan, while others may follow generally accepted standards and practices for accounting and the industry. Additionally, financial controls may be mandated by the government.

Man climbing a rope
Man climbing a rope

Accounting statements are a key component of financial controls. Companies need to keep internal records on profits and losses, revenue sources, expenditures, and related matters. If they are publicly traded, this information may need to be disclosed to shareholders by request and in an annual report. This keeps the company accountable to people with a financial interest so they can take action if there are concerns about fraud, theft, or other issues.

Policies are also a component of financial controls. A clear framework helps officials at companies decide how to create and administer budgets to keep their financial controls consistent and effective. This can include topics ranging from a chain of command when it comes to financial decisions to certain requirements that must be met in requests for funding within the company. Officials can set and review policy to ensure it meets the needs of the company efficiently and appropriately. Periodic adjustments may be needed as companies change focus or mission.

Officials make use of financial controls to determine whether companies are getting a return on investment. These financial controls can include internal auditing for accountability, to confirm that the records are accurate and within regulatory bounds. Administrators review reports and documentation to learn more about the company’s activities and performance. They must consider the interests of the firm itself along with shareholders. In the event of problems, they can develop proposals to increase revenues, reorganize, or close the company down if it can no longer function.

Failure to implement financial controls can result in penalties. These can include fines for failing to file taxes, along with jail time for officials if there is evidence of fraud or other wrongdoing. Large firms may have a compliance department that focuses solely on ensuring the company operates inside the law and adheres to its own stated policies. Such departments may have broad scope when it comes to ordering audits, meeting with personnel, and reviewing documentation, as this allows them to act quickly and decisively in a variety of situations.

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