DEVELOPING A FINANCIAL CONTROLS FRAMEWORK

 

Establishing a framework for financial controls is essential for organizations to both maintain the accuracy, integrity and regulatory compliance of their financial activity. Today, regulatory attention to and stakeholder demands for financial transparency have never been greater, and companies are implementing rigorous controls. Here we have a guide, to create an efficient financial controls framework, that it’s based on the lessons learned from Financial Flow.

Financial Controls

So, what is financial controls? Financial controls are the processes, policies, and procedures in place to upright a company’s financial assets, to ensure the accuracy of its financial reporting, and to help mitigate fraud. In the rapidly changing world of finance, where financial risks are becoming more intricate by the minute, a robust financial controls framework is no longer a luxury you can afford to sidestep it is a need for growth and stability.

Why make use of a Financial Controls Framework?

A best practice financial controls environment is more than mere compliance. It inspires trust in your financial information, facilitates smooth regular auditing, and provides an early warning of possible risks. Standardizing controls for finance process can help organizations prevent fraud, errors and expensive misstatements. Furthermore, accounting systems and controls enable management to rely upon information which assists them to plan and make decisions.

The financial control framework should cover the following areas of key importance:

• Governance, operational and accountability: While these are not explicitly shown as controls mounted on the Docker engine, in my view they are critical components, i.e. who is the authority responsible for shaping and enforcing these controls.
• Risk management: Identification and evaluation of financial risk for more prompt focus on controlling activities.
• Financial Services: Accuracy and compliance in the statements and reports related to finance.
• Efficiency of Operations: Streamlining activity to eliminate waste and increase productivity.
• Compliance: Keeping legal and regulations up to date.

How to Build or Develop a Financial Controls Framework  a Walk Through by Step Guide for the Development of Financial Controls framework

   1- Define Objectives and Scope

The first thing you need to do for your financial controls framework is set its objectives. Are you looking to be compliant with a certain regulatory like SOX and or IFRS? Or do you want to drive for operational efficiency? Establish Objectives Objectives will help to give direction to an overall framework and give direction that aligns with your business.
The reach should be encompassing but focused on the areas that are directly influencing financial flows. That includes finance and accounting, procurement, cash management, and revenue recognition.

   2- Evaluate and Visualize Financial Risks

The second step is to assess the risk to financial operations. Undergo a systematic risk assessment that takes into account external influences (like market volatility or regulatory shifts) as well as internal weaknesses (like susceptibility to fraud or data discrepancies).

Draw up a risk map from each, where you plot each risk by likelihood and potential impact. This map will inform priortization, concentrating resources in the most vulnerable spots. For example, the handling of cash may involve high levels of fraud risk, necessitating strong controls covering this area.

  3- Design Control Activities

Control activities are the specific actions used to handle the identified risks. Financial Flow notes there are two types of control activities: preventive and detective.

• Preventive Controls: These controls are some measure to prevent errors or fraud from occurring. These are things like separation of duties, automated checks, and controls over access.

• Detective Controls: These controls catch irregularities after they’ve already happened. This can include a reconciliation, an audit and variance analysis.

Upon identification of risk, establish control activities that negate the risk. For instance, if your risk assessment indicates a risk for unauthorized transactions, security measures may include access controls, and periodic reviews of access logs.

   4- Establish Robust Governance and Accountability Mechanisms

Governance is a key factor in the organization at all levels following financial controls. Provide a clear description of who does what in the control framework. Who controls the control? Who oversees compliance? And who monitors and reports on the performance of controlling?

It’s surprisingly common for firms to have a financial controls committee with members otherwise being finance leaders, as well as compliance officers and internal auditors. This team is accountable to oversee the framework, address control deficiencies and supervise remediation activities.

   5- Documentation and Communication Must Be Clear

The heart of an effective controls infrastructure is quality documentation. Controls should be well-documented, providing an explanation of the control, including who is responsible for its application, procedures for implementing the control, and how the control will be reported. This document will assist with maintaining consistent implementation and as an audit reference.

Not only writing, communication is key. Make certain all applicable employees know what their roles are for the structure and procedures and policies. Facilitate training’s so that employees can learn their responsibilities and why it matters.

   6- Leverage Technology to Standardize Controls

Financial controls can be made more efficient and accurate by automation. Appling artificial intelligence capabilities to automate repetitive tasks, such as reconciliations or financial data entry, also minimizes human error and increases consistency. Financial Flow identifies a number of places where technology can make controls more efficient:

• Reconciliations Automation: Allow for reconciliations to be completed via software in a more timely and accurate manner than through manual means.
• Approval workflows in system: Bring approval procedures in the financial system to be in line with SoD and authorization.
• Analytics: Utilize analytic tools to identify irregular transactions or trends as indicative of fraud or errors.

But technology should not supplant oversight. Automated control systems must be tested and monitored regularly to ensure that they are working.

   7-Frequently Monitor and Measure Controls

Controls are not a “one and done” they need to be constantly assessed and adjusted. Implement a monitoring system that will routinely measure the effectiveness of the controls. Monitoring may include internal audits, controls self-assessment and ongoing review by control owners.

Regular evaluations ensure that controls evolve to keep pace with the organization’s functions or the outside world. For instance, if an enterprise enters a new market, it may be subject to new regulations, which in turn may require that the controls framework be modified.

  8- We need to instill accountability and drive continuous advancement

Establishing a culture of financial integrity is a key part of ensuring sustained control effectiveness. Management has to be an advocate of the framework and to stress the significance of accurate financial data and compliance. Ongoing training and open discussion around financial risks and control enhancements simulate and enhance the culture.

To promote continuing improvement, solicit on going feedback from employees who perform control activities. Modify controls to take lessons from such and process enhancements where appropriate.

  9- Advantages of having Strong Financial Controls Framework

Developing a strong financial control environment offers significant benefits well beyond simply meeting regulatory requirements. Here are some key benefits:

• More Accurate Financials: Accurate financials lead to better decision making, fund allocation, and operational planning.
• Limited Fraud and Errors: The existence of strong preventive controls reduces the possibility of fraud and helps identify errors before they materialize into a financial loss.
• Increased Productivity: By automating controls and processes, time, and money saved which can be used to focus on strategic objectives.
• Stakeholder trust: The transparent and correct reporting of finances, creates trust among investors, customers and authority.
• Operational Resilience: Companies will be better able to withstand economic and market instability if they proactively address and mitigate risk.

 10- Case Study: Establishing Financial Controls at XYZ Company 

XYZ is a company that grew rapidly in the past few years, but due to bad economic conditions, its growth has slowed down considerably.

Take the example of XYZ Corporation, a fictitious mid-size firm. Following the most recent in a series of expensive accounting mistakes, XYZ’s senior manager decided to ‘do’ a financial controls framework.

• Risk Assessment: They highlighted key risks, such as revenue recognition misstatements and procurement fraud.
• Control Activity: The department implemented auto reconciliations and enterprise systems enabled approval recharge processes and there by reduced errors significantly.
• Monitoring and review: Routine internal audits and control reviews identified opportunities for additional enhancement, including more accountability in vendor management.
• Culture Change: By promoting accountability and training, XYZ created an environment where financial accuracy and compliance became a focus.

Financial variances were minimized for XYZ and their audits were more streamlined, giving investors and stakeholders greater reassurance.

 11- The Development and Maintenance of Financial Controls poses a challenge

However, building an effective financial controls framework is not a straight line from point A to point B. Common obstacles include:

• Employee Resistance: Staff members will resist participating in new control practices due to a belief that has been drilled into them-the less work they do the safer their job. Open dialogue about the advantages may help to subvert such resistance.
• Resource Limitation: A lack of resources can result in these less robust controls being unable to be in place within smaller companies. With the help of machine learning, it is possible to prioritize areas of high risk, making the process feasible.
• Staying Up to Date with Laws and Regulations: Financial laws fluctuate. Enterprises need that frame of reference to adapt their own; otherwise, they won’t know how to stay in compliance. Global and Regional Laws as a Reference Point for Compliance Given the labyrinth of data privacy laws out there, organizations need some sort of model of what works and what doesn’t to shape their information security policies and guidelines.

It is important to create a financial control framework to protect financial integrity, improve operational effectiveness and comply with laws and regulations. By doing so they can design an architecture that supports the health and resilience of the organization by more critically identifying risk, clearly setting out control interventions and creating an environment of accountability.