Strong Controls are a Competitive Edge

A strong internal controls environment is critical to a company’s successful growth. If your company’s exit strategy is to transform equity into cash via an asset sale, merger, or IPO, it’s best to create a strong controls environment early. Getting an early start is a relatively low-cost way to build value and increase the reliability of the company’s financial information—both of which are significant drivers and indicators of a company’s success, even when an exit is not in your future. Give your company a competitive edge by ensuring that your internal controls are strong.

Here are five steps you can take to build a strong controls environment:

• Embed the control structure into the company’s culture (tone at the top).
• Start the control process early and maintain a focused, risk-based approach.
• Create a streamlined controls structure.
• Automate controls wherever possible.
• Rely on compliance tools when Sarbanes-Oxley Act (SOX) compliance is required.

Set the Culture and Tone at the Top

Generally, earlier stage companies don’t have controls built into their culture and tend to feel the most burdens on resources. Management sometimes resists implementing controls due to a fear of high costs and an increased burden on staff. But informal controls often already exist as part of the organization’s operations and can be woven into an effective, formalized control structure with minimal effort. To encourage a control-focused culture in your company, top executives should include a control optimization program as part of the organization’s strategic plan. And consider creating a periodic sub-certification process in which those who are responsible for monitoring the controls certify that controls are in place. Your company’s performance incentive and evaluation process can also be used to encourage employee buy-in, starting from the top.

Start Early and Focus on Risk

Regardless of the economic climate, an efficient company can gain savings and concentrate resources to grow the business. Early on, a company should determine where the risks lie in the organization and create control procedures to monitor those identified critical areas. A risk-based approach can benefit any company. By focusing on risks, management can greatly decrease the workload and strengthen the control environment.

The best way to monitor controls efficiently is to follow Frank, Rimerman’s five best practices:

• Strong executive tone at the top
• Continuous risk and materiality assessment
• Streamlined control structure
• Control automation
• Efficient tests of control effectiveness

Coming soon: Real-world case studies from companies who have built value by optimizing their internal controls environment using these five principles.

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