While internal controls are primarily established to ensure compliance, they also play a vital role in maintaining the security and reliability of an organization’s systems and operations — an aspect that can sometimes be underappreciated by financial teams. Although audit and finance teams may occasionally treat internal controls as procedural requirements, these measures can serve as crucial tools for effective governance. Simple checks, such as setting purchasing limits on company cards or enforcing password protection for financial transactions, can make a significant difference in preventing fraud and promoting accountability.
For instance, one-third of all fraud committed in 2020, when there was a major shift to online working, resulted from weaknesses in internal controls.
This article will help you strengthen your system and remain in compliance by explaining:
- What internal controls are
- Why internal controls are important
- The three types of internal controls
- Examples of internal controls in an organization
- Best practices for managing internal controls
- Emerging technologies streamlining internal control workflows
What Are Internal Controls?
Internal controls are essential for businesses to ensure that their systems are secure. Controls have different components and are usually rooted in an organization’s systems. Employees may engage with a control structure daily, like inputting credentials to unlock a point of sale, without realizing they are following an intentional security protocol.
But whether employees know it or not, these controls prevent breaches, fight back against fraud and ensure that only authorised users can access sensitive systems and information.
What Is The Purpose of Internal Controls?
The primary purpose of internal controls is to secure a business’s information and assets – making it particularly important for finance teams. An internal controls system minimises risk and promotes compliance as a business pursues its objectives.
They’re also a critical form of documentation to assure the board and other key stakeholders that:
- The company’s information is reliable and credible
- The organization complies with relevant laws and regulations
- The company’s assets are secure from fraud or breach
- The company put resources to good use
- Operations and programs are functioning as intended
Why Are Internal Controls Important?
Internal controls are important because they protect an organization’s systems, data and assets. As significant as security is, the importance of strong internal controls is even further-reaching than that.
An effective framework for internal controls can help organizations:
- Implement processes: When internal controls are in place, employees know the processes and procedures they should follow. This strengthens the company because employees understand their expectations and can securely engage with systems and data.
- Reduce fraud: A key tenet of internal controls is segregating duties, meaning the person undertaking an action isn’t also the person approving it. For example, an employee purchasing new laptops for the sales department shouldn’t be the same employee who approves the purchase order. This ensures that all actions are meaningful and necessary and reduces fraud.
- Improve financial reporting: Financial statements can be difficult to produce if the organization’s transactions aren’t regularly available. Having controls around how and when employees should report transactions paves the way for more accurate financial statements, enabling leadership to make more informed decisions involving the company’s finances.
- Identify errors: Mistakes happen. It’s all too easy to transpose digits or enter a figure on the wrong line. The purpose of internal controls like automation is to help organizations catch and fix those errors before they cause costly reputational damage.
3 Types of Internal Controls
There are many different internal controls, but they typically fall into three different categories. All organizations should aim to have controls that align with these internal control types:
- Preventative controls: This control group encompasses any internal control that prevents risky actions from occurring, such as application controls.
- Corrective controls: These are the controls that come into play after the system detects an issue or error.
- Detective controls: Also called mitigating controls, these are the actions and processes that sound the alert if an error occurs. These controls are an important way to stop breaches before they lead to more costly damage.
Examples of Internal Controls
Every organization may need slightly different internal controls to ensure the security of its systems and data. However, some internal controls are fairly common regardless of the organization and industry.
Some common examples of internal controls are:
Transaction authorisation: A preventative control
Most organizations have employees who will make purchases on the organization’s behalf. A common preventative control for this situation is to have a process for authorising that transaction.
For example, a technology company has recently hired three new website developers. The website development manager needs to purchase a laptop and monitor for each developer. To do that, they’ll have to follow several controls. The process might look like this:
- The manager submits a purchase order to the accounting department
- The accounting department approves the purchase order
- The manager uses the purchase order to buy the approved equipment
- The manager gives a receipt to the accounting department
Reconciliation: A detective control
In the above scenario, the organization likely has multiple departments making various monthly purchases.
At the end of the month, an accountant or accounting department should reconcile all those transactions — an important internal control to detect transactions that are either fraudulent or do not comply with business policies or industry regulations.
A reconciliation internal control might require the accounting team to:
- Issue approvals for certain transactions
- Collect receipts or expense reports for all spending or both
- Check transactions against those receipts
- Report to senior leadership if any transactions don’t match receipts
Best Practices for Managing Internal Controls
Effective internal control management is critical for sidestepping failures like those outlined above. Whether your organization is scaling quickly or operating across multiple jurisdictions, the following best practices will help you design, implement and monitor strong internal control systems that finance teams can use to run a tight ship.
- Establish a risk-based control framework: Not all risks are equal. Use a risk assessment process to identify your organization’s most critical vulnerabilities — financial misstatements, fraud, cybersecurity threats or compliance failures — and align controls to those risks. Frameworks like COSO or NIST can guide this process.
- Define clear roles and responsibilities: Effective internal controls rely on the segregation of duties and clarity regarding who owns each process. Assign roles for control design, execution, monitoring and remediation. Ensure executive leadership and audit committees are involved in oversight.
- Automate where possible: Use technology to reduce manual errors, increase consistency and improve efficiency. Examples include automated approval workflows, system-enforced access controls and reconciliation and exception alerts. This is especially important in areas like financial reporting, procurement and cybersecurity.
- Document policies and procedures thoroughly: Well-documented internal control policies serve as both a training tool and a compliance requirement. Ensure that control activities, review cycles, escalation steps and audit trails are clearly written and accessible.
- Conduct regular control testing and monitoring: Controls are only effective if they’re consistently applied. Conduct periodic internal audits or control testing to verify design effectiveness, confirm operating effectiveness or identify gaps or process deviations. Use real-time dashboards where possible for continuous monitoring.
- Train employees and reinforce ethical culture: Internal controls are most effective when supported by an organizational culture of integrity. Provide ongoing training on control procedures, ethical conduct, fraud awareness and reporting mechanisms.
- Use technology to scale and strengthen controls: Modern technology solutions like Diligent Internal Controls Management enable real-time monitoring, centralised documentation and improved audit readiness. These tools are especially valuable for multi-entity organizations and remote teams managing distributed control environments.
Emerging Technologies in Internal Controls
As internal control environments grow more complex, best practices alone aren’t enough. Emerging technologies have begun to reshape how organizations monitor risk, ensure compliance and respond in real time. These tools not only enhance control effectiveness but also free up teams for more strategy.
- Automation: Process automation continues to streamline repetitive control activities like reconciliations, approvals and access provisioning. From reducing manual errors to accelerating audit readiness, automation is now foundational to modern control systems. Read our full blog on internal control automation to learn more.
- AI-driven monitoring: Artificial intelligence is now enabling continuous control monitoring by analysing large volumes of transactions in real time to detect anomalies, fraud indicators or control failures. AI-powered tools can flag suspicious activity, enforce thresholds and even suggest control improvements based on historical patterns.
- Data analytics: Advanced analytics help organizations move from reactive to proactive control management. By aggregating and analysing data from across business functions, internal audit teams can identify control gaps earlier, uncover hidden risk trends, prioritise high-impact remediation and visualise control performance.
- Integration with broader GRC platforms: Internal controls are no longer siloed. Rather, they’re increasingly pivotal to enterprise-wide GRC platforms. Integrating the two improves visibility, centralises control documentation and connects compliance efforts across IT, finance, operations and legal functions.
Diligent Internal Controls Management and ACL Analytics
Technology can force organizations into a corner, having to choose between strong governance and deep analytics. With Diligent, you can have both. Diligent Internal Controls Management brings breadth to your internal control oversight and compliance, while ACL Analytics is the ideal companion for in-depth risk coverage and continuous improvement.
These tools, together, go both broad and deep, bringing you an internal controls function that doesn’t just check boxes but actually mitigates risk, enables proactive decision-making and drives measurable business value.
Internal Controls Management systematises your controls from end to end through:
- Streamlined documentation and workflows: Centralise all control activities, consistently assigning, tracking and escalating tasks all within a single platform.
- Task automation: Eliminate manual steps in control testing, reporting and approval processes and win back time for more strategic compliance and audit activities.
While your internal control processes run seamlessly, ACL Analytics takes a closer look at:
- Controls monitoring: Automate control testing across entire datasets — not just samples — strengthening both detective and preventative controls.
- Advanced data analytics: Quickly identify exceptions, anomalies or patterns that indicate control weaknesses or emerging risks.
- Controls coverage: Diligent’s ACL tool cuts audit/controls reporting time by 20-30% while achieving 100% controls coverage. This can lead to over $1.3 million in productivity gains and reduced audit/control risk.