GAAP, the holy grail of the accounting profession, is underpinned by a variety of “AC” Statements, making it the sacred realm where only angels and demons fear to tread. Little men in pin striped suits who drive luxury German sedans and call themselves auditors use this in their arsenal of jargon to confuse unsuspecting clients, albeit that the Big 4 famous brands recently experienced some adverse publicity and some say reputational damage. This raises the question whether the accounting profession is adequately independently regulated and the extent of reliance that, as a result, may be placed on audited financial statements.
Some years ago, a concept of combined assurance emerged as part of the overall governance toolkit, sending many CEO’s running for cover faster than you could say “Indiana Jones.” It brings together the work conducted by an organization’s various Levels of Defense, and by that, I mean Management; Risk and Compliance; Internal Audit; and External Audit, providing the Board/business owners with a reasonable level of assurance that the efficacy of their systems of internal control are adequate to achieve the desired outcome(s). Internal Financial Control (“IFC”) are part of this tangled web of systems and forms an integral part in the preparation of accurate financial accounts.
So, what exactly are IFC and how do you as a business owner understand whether they meet the requisite standards? Before reaching for your GAAP handbook, consider the landscape from the input of financial data to the generation of a comprehensive set of accounts – you have a plethora of processes to consider and probabilities of material error to estimate, so my advice is to either head of the hills or contact a trusted professional who should be able to assist you. If you are a listed entity then such an evaluation and statement from your auditors will be an annual event but if not, then it is certainly a nice to have but not a mandatory requirement. So, depending on whether you regularly encounter material errors in your accounts or suspect inaccuracies, then you may want to err on the side of caution and go this route.
The evaluation of IFC is a specialist field and there are not quick fixes like the 5-minute MBA or Windows for Dummies. There are also a number of consultancies who will charge you an arm and a leg for taking on such a task so be sure to select someone with a good reputation and that provides value for money. Staying with the subject of control, I will deal with everyone’s favorite topic in my next blog which is fraud – what it is; the obvious signs that an employee is committing fraud; and how to prevent it. As always, stay true to yourself and if your Debtor’s Clerk is driving a Porche, then be sure to read my next blog.