An Introduction to Internal Controls
Businesses today are constantly facing new risks, and it can be challenging to keep up with the changes in technology and best practices for protecting your business. For example, as tensions continue to rise between the United States and Iran, the risk of cybersecurity incidents goes up for American companies. American companies need to be aware of geopolitical risks and take steps to mitigate them.
One of the most effective ways to ensure your organization is taking the correct steps to mitigate risks is to develop a set of internal controls that ensure your processes, policies, and procedures are designed to protect your valuable corporate assets and keep your company secure and intact. Internal controls help your employees carry out their jobs in a way that protects your organization, your clients, and your bottom line.
What are internal controls?
Jonathan Marks, a well-known professional in the forensics, audit, and internal control space, defines internal controls as, “…a process of interlocking activities designed to support the policies and procedures detailing the specific preventive, detective, corrective, directive, and corroborative actions required to achieve the desired process outcomes of the objective(s).”
Internal controls are processes that mitigate risk and reduce the chance of an unwanted risk outcome. While we will discuss specific types of internal controls later, it’s important to understand that internal controls will be somewhat unique to your business depending on what risks are most probable given the type of your business, your industry, and so on. The process of defining and implementing internal controls is often iterative and will take time, but it will ultimately make your company stronger and more resilient to risk.
Why Are Internal Controls Important?
Utilizing internal controls isn’t just about protecting your bottom line or making your operations as efficient as possible; in some instances, there are federal or state regulations that require businesses to prove they have an internal control in place.
For example, the Sarbanes-Oxley Act of 2002 (SOX) requires annual proof that
- A business accurately reports their financials
- Their procedures effectively prevent fraud, and
- They have addressed any uncertainties.
For public companies, it is required by law that they comply with SOX. To meet this requirement, a business not only needs to have processes in place to ensure financials are accurate, but also a process for identifying fraud that is acceptable to regulators.
If you want to achieve certifications for certain voluntary cybersecurity frameworks (e.g., SOC 2 or ISO 27001), you will also need to produce proof of internal security controls and have those controls audited by independent IT auditors. Internal controls are often the best way for your business to meet compliance standards and ensure you’re carrying out those requirements effectively and not simply checking off boxes.
Internal Controls and Data Security
As we stated in the previous section, some of the more common data security frameworks require some type of internal controls, but the relationship between compliance and internal controls goes even deeper than that.
Having internal controls as a built-in part of your compliance and data security programs is the key to ensuring you have effective programs in place. It’s important that you know how your compliance program is performing; if there is a cyber security incident, outside regulators examining your program will quickly be able to tell if your business is making an actual effort at compliance or if you are simply going through the motions.
Five Kinds of Internal Controls
The Committee of Sponsoring Organizations of the Treadway Commission (COSO) provides five types of internal control to help companies develop their own unique and effective internal controls.
Control environment: This comprises the framework and basis of your internal controls program, including the processes and structures that create the foundation of the internal controls your business carries out. The control environment also includes:
- The integrity and ethical values of your organization
- Parameters for how and when the board carries out their responsibilities, and
- Incentives and rewards.
Simply put, the control environment is the culture your company creates around internal controls. The executives, upper management, and team leads must all communicate the importance of internal controls downward and every process must take place within the parameters of the control environment.
Risk assessment: To build effective internal controls, a business must first understand what risks they are controlling for and what their business is up against in terms of internal and external risks. A proper risk assessment means identifying risks in all areas of your business, both inside your organization and outside, and then identifying ways to mitigate those risks or bring them down to an acceptable level.
Control activities: Control activities are where the rubber meets the road. They are how your risk management strategies are actually carried out in the policies and procedures that govern the day-to-day activities of your employees. These activities are embedded throughout your entire company, and they are designed to identify, monitor, and, ultimately, prevent risks from manifesting.
Information and communication: In many ways, communication is the most important part of the internal controls your organization puts in place. If an internal control shows that a process isn’t working, and that isn’t communicated upwards to those who can fix it, what’s the point of having the internal control in the first place? How will your organization benefit from the internal control if a manager doesn’t have a channel for communicating with control owners and policymakers within the company?
There must be an open channel of communication regarding internal controls, and robust reporting and information gathering is key to reaping the benefits of all the work and time that go into internal controls.
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Monitoring: To gauge the effectiveness of your internal controls, and to ensure you’re addressing any gaps in the controls you’ve developed, you need to continuously monitor your controls and conduct tests to make sure your processes are working as designed. Ideally, these tests are automated, not manual. This reduces the chance of human error that can leave your assets vulnerable. For example, forgetting to revoke access privileges to critical systems when an employee quits will leave your organization open to threats. But it’s easy to forget to remove a departing employees’ access to certain systems if it is a manual process. Automating this process removes that risk from the equation.
Additionally, having open communication and a dedicated channel for people who have concerns or have experienced issues is an important practice to ensure the continued success of your internal controls. Further, conducting internal controls audits will also give you insight into how your internal controls are performing.
Conducting an internal control audit: An internal controls audit simply tests the effectiveness of your internal controls. When it comes to financial internal controls, the Sarbanes Oxley Act made businesses legally responsible for ensuring their financial statements are accurate, and the Public Company Accounting Oversight Board developed the standard that used to evaluate internal controls in their Auditing Standard No. 5.
Financial internal controls audits are performed by CPAs and require an organization to provide proof of the process your organization uses to evaluate your controls and financial statements. This can require a lot of documentation, but if your organization has been monitoring your internal controls and creating regular and thorough reports, and consolidating all of that information in one place, producing it should be relatively simple.
Improving Cybersecurity and Preparing For Cyber Incidents
Have a data breach response policy in place: The best way to handle a data breach correctly is to plan your response ahead of time and test early and often. A tried and tested plan set up before an incident ensures you won’t forget important actions when a crisis strikes.
Understand what your risks are: Before you can take steps to protect your electronic assets, you need to understand what you’re protecting them against and how to effectively guard them. Performing an information security risk assessment will give you a detailed look at your risks and help you decide how to best mitigate them.
Take both physical and electronic threats into consideration: When it comes to information security, it’s not just about who has electronic access to data or email policies. In the course of their jobs, many employees come into contact with hard copies of sensitive information or have access to places where assets are stored, and your business needs to have policies and controls that protect physical assets as well as electronic threats.
Work on your compliance processes: Going through a thorough compliance process will give you the opportunity to uncover gaps in your security program. When we talk about a compliance process, we are really talking about identifying a cybersecurity framework (e.g., SOC 2, NIST 800-53, ISO 27001) you want to implement, understanding the requirements and controls outlined in the framework, taking inventory of your own internal controls and security measures to understand the gaps in your program, and then putting measures in place to fix or refine deficient controls and processes.
When you decide to become compliant with a cybersecurity framework, you will go through a process that forces you to inventory your strengths and weaknesses. You will educate yourself on modern best practices, and the exercise can serve as a springboard to put in place or refine deficient controls and processes.
How Can Automation Enhance IT Security?
When it comes to internal controls, just like with most business processes, automation often makes things easier, faster, and less prone to mistakes. Preparing for any type of audit is a daunting prospect, and automating procedures like
- Communicating with people who maintain or create documentation
- Updating documentation when frameworks or requirements are changed, and
- Requesting sign-offs on evidence
will change your team’s experience with audits in a positive way. When you focus on automating the mundane, repetitive tasks, it frees up your employees to use their skills and expertise to solve more complex problems and evaluate the success or failures of your internal controls.
Moving Forward With Internal Controls
While implementing internal controls will ultimately help your company, it is a lot to take on and manage. Utilizing a compliance software solution like Hyperproof can help you make this process easier and more effective. Hyperproof has pre-built frameworks for the most common compliance requirements like CCPA, GDPR, and ISO 27001 so you don’t have to research the internal control requirements and parse what is required of your company on your own.
If you want to find out how Hyperproof can streamline your compliance process and improve your security posture, visit our website today.
The post Internal Controls and Data Security: How to Develop Controls That Meet Your Needs appeared first on Hyperproof.
*** This is a Security Bloggers Network syndicated blog from Hyperproof authored by Jingcong Zhao. Read the original post at: https://hyperproof.io/internal-controls-and-data-security/