Internal Controls – Reporting

Post By Tony Cafferelli

Internal controls over financial reporting is vital to preventing and detecting material misstatements. In order to achieve reasonable assurance that your Plan’s financial reporting objectives are being met, you must first ensure that your internal controls are working effectively. To ensure effective internal controls over financial reporting, a few things must first be considered: The audit committee, trustees, and management must set the appropriate environment or tone at the top with respect to oversight and ethical standards. If you want your controls to be taken seriously, you must demonstrate their importance daily. Where to implement controls is very important. Controls should focus on high risk areas to prevent material misstatements. Implementing controls in an area that is not material or at high risk can squander valuable resources. For example, as a parent you wouldn’t childproof your cabinet drawers when your children are teenagers. Parental controls on your TV and internet would be a more efficient use of resources.

Matching the right control to the activity is vital to being both efficient and cost effective. A high risk area may not need segregation of duties, approval authorization, reconciliation, review, and physical security to achieve an effective internal control. It may only require segregation and approval to achieve reasonable assurance the control is effective. Consider this example: When building a shed, you could hammer five nails into each plank to make sure it is secure, but that will drive up your cost and reduce your efficiency. One or two strategically placed nails can provide you the same assurance while keeping the cost down. Communicating the controls and objectives with personnel is vital. Employees must know what is expected of them and be provided with the right information in order to properly execute the controls put in place by management. Lastly, controls must be monitored continuously. Utilizing another children example: if you set a bed time of 9:30 PM and expect it to be adhered to, you need to be present and monitor occasionally that they are in fact going to bed. If you go a month without monitoring their bed time, you run the risk that they will slowly push the limits past 9:30 PM because you have demonstrated that their bed time is no longer important to you.

As a fiduciary of a benefit plan, these controls are essential to both your individual success and that of the Plan. The plan administrator is responsible for the internal control systems covering plan assets and records. Plan employees are susceptible to human and judgement errors. To guard against the risk of these types of errors a plan must have effective internal controls.

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