Controls that are designed to provide management with assurance of the realization

Internal control is defined as a process, affected by an entity’s board of directors, management, and other personnel, designed to provide reasonable assurance regarding the achievement of objectives in the following categories:

• Effectiveness and efficiency of operations, including operational and financial performance goals, and the safeguarding of assets against loss;
• Reliability, timeliness, and transparency of internal and external financial and non-financial reporting; and
• Compliance with applicable laws and regulations.

Internal control consists of the following five components:

1. Control Environment - The control environment is a set of standards, processes, and structures that provide the basis for carrying out internal controls across the organization.
2. Risk Assessment - Risk assessment involves a dynamic and iterative process for identifying and analyzing risks to achieving the entity’s objectives, forming a basis for determining how risks should be managed.
3. Control Activities - Control activities are the actions established by policies and procedures to help ensure that management directives to mitigate risks to the achievement of objectives are carried out.
4. Information and Communication - Information is necessary for the entity to carry out internal control responsibilities in support of the achievement of its objectives. Communication enables personnel to understand internal control responsibilities and their importance to the achievement of objectives.
5. Monitoring Activities – Evaluations are used to ascertain whether each of the five components of internal control is present and functioning.

Limitations of Internal Control

While an effective system of internal control provides reasonable assurance of achieving the entity’s objectives, inherent limitations do exist. Limitations may result from the:

• Suitability of objectives established as a precondition to internal control;
• Reality that human judgement in decision making can be faulty and subject to bias;
• Breakdown that can occur because of human failures such as errors;
• Ability of management to override internal control;
• Ability of management, other personnel, and/or third parties to circumvent controls through collusion; and
• External events beyond the organization’s control.

The above definition of internal control and related concepts are taken from Internal Control -- Integrated Framework by the Committee of Sponsoring Organizations of the Treadway Commission.

For more information about segregation of duties, see the chart here.

It is not always easy to understand the difference between internal control and management control. However, they are two complementary functions for the good management of companies. Beyond a simple reminder of the definitions, it is important to make a concrete distinction between their respective activities within the company. For example, internal control makes little use of the company’s accounting figures, whereas management control is closely linked to accounting and handles the figures on a daily basis. Take the time in this article to take stock of these differences once and for all and finally understand their respective roles.

Internal control and management control: definitions

> What definition should be given to management control?

According to the French General Chart of Accounts (Plan Comptable Général (PCG) III), the accounting reference standard that defines the rules applicable to French companies, management control is “the activity aimed at controlling the reasonable conduct of an organization by anticipating events and adapting to changes, defining objectives, setting up means, comparing past and future performance and objectives, correcting objectives and means. »

Thus, management control is concerned with the risks that may affect the company’s business model. It generally reports to the company’s General Management.

> What is the definition of internal control?

The Committee of Sponsoring Organizations of the Treadway Commission (COSO), the reference body on the subject, defines internal control as “a process effected by an organization’s management body, board of directors, officers and employees designed to provide reasonable assurance regarding the achievement of the following objectives:

– Strategic: alignment of missions with corporate objectives ;
– Operational: effective and efficient use of resources;
– Financial reporting: reliability of financial information ;
– Compliance: compliance with laws and regulations. »

Thus, the objective of internal control is to provide the keys to better control processes in order to achieve the company’s objectives, regardless of its size. It must be totally independent of General Management.

Internal control and management control procedures: marked differences

The terms “management control” and “internal control” may be confused, yet their implementation framework is quite different.

Management control is based primarily on accounting figures, often derived from accounting software. Its purpose is to ensure that the company’s financial management and sustainability are sound. Its approach is structured by drawing up and monitoring budgets.

Although a company’s accounts must be audited by an external institution, management control does not involve internal auditing and, by law, is not subject to external auditing.

Internal control, on the other hand, focuses on the construction and analysis of the operational functioning of the company. It not only uses internal audit to verify the proper application of procedures, but may also be audited by an external body that verifies its existence and validity, depending on the applicable legal requirements.

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Management controller and internal controller: what do they do on a daily basis ?

The tasks that specifically fall within the remit of internal control or management control allow us to understand their specificities and to better understand their particularities.

Activities and processes related to management control include, among others :

– The implementation of cost accounting;
– The establishment of the budget;
– The monitoring of expenditure and income;
– Analysis of the balance sheet and income statement;
– Cost analysis;
– The follow-up of the treasury ;
– Drawing up a financial report on a given theme (product margin, profitability of a department, etc.).

The activities included in the framework of internal control are :

– Monitoring the implementation of controls;
– Monitoring the implementation of controls; – Monitoring the implementation of controls;
– The recording and analysis of incidents;
– Conducting a risk review;
– The description of processes;
– Monitoring of risk reduction projects;
– Drawing up an annual internal control report.

A difference illustrated by their position in the flowchart

While it is no longer necessary to highlight their differences, looking at the position of internal control and management control in the company’s hierarchical organization chart provides a definitive grasp of their respective roles.

Regularly, the Chief Executive Officer (CEO) of a company needs information to enable him to make the best decisions. To do this, he relies on the reports of the management controller. The latter provides him with essential financial information, such as the source of revenues, their frequency, expenses, etc. These management reports enable the CEO to take the most appropriate corporate orientations and to justify his choices before the board of directors and shareholders.

Conversely, internal control is totally independent of the CEO, since it controls errors and possible fraud, including those of the CEO. Internal control ensures compliance with processes, procedures, laws and standards. The independence of its internal controllers during audits is therefore of paramount importance. It reports its findings directly to the Board of Directors.

Despite a common term that can sometimes make their differences confusing, internal control and management control have their own particular fields of action, specific approaches and a well-defined place in the organization chart. They complement each other, contribute to the company’s good health and are powerful management tools.

A simple and useful internal control for everyone!

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