Be the Vigilant Guardian: The Monitoring Component of Internal Controls for Your Nonprofit

At a glance:

• The main takeaway: The monitoring component of internal controls, achieved through activities designed to assure that internal controls operate as intended, is crucial for avoiding error and fraud in any organization.
• The impact on your business: Benefits of implementing effective monitoring include continuous improvement, risk mitigation, regulatory compliance, accountability and transparency, efficient resource allocation and enhanced decision-making.
• Next steps: To assess the performance and adequacy of their internal controls, organizations should implement effective monitoring by following the steps listed in this piece.

Schedule a consultation with Aprio’s Information Assurance Services and Risk Management team today for help establishing a set of internal controls for your organization.

The full story:

This is article #3 in a series of 5 designed to help leaders establish effective internal control frameworks to protect their organizations. In a world of fast and open information, safeguarding assets, ensuring financial accuracy and maintaining a culture of integrity are paramount.

To be effective every internal control framework must have the following five components.

1. The control environment
2. The risk assessment process
3. The process of monitoring internal controls
4. The information system and communication
5. Control activities

Among these components, the monitoring component plays a vital role in ensuring the effectiveness of an organization’s internal control system.

The monitoring component is like a watchful guardian, constantly overseeing an organization’s internal control system. It serves as the mechanism by which an organization assesses the performance and adequacy of its internal controls. Monitoring activities are designed to provide assurance that internal controls are operating as intended and are responsive to changes in the business environment.

Benefits of the monitoring component include:

• Continuous Improvement: The monitoring component is not a one-time event but a continuous process. It ensures that internal controls are regularly reviewed and adjusted to meet changing circumstances, regulations and risks. By maintaining vigilance, organizations can adapt and improve their controls over time.
• Risk Mitigation: Effective monitoring helps identify control weaknesses or deficiencies early, allowing organizations to take prompt corrective actions. This proactive approach minimizes the likelihood of errors, fraud or compliance violations, reducing the organization’s exposure to risks.
• Regulatory Compliance: Regulatory requirements are constantly evolving. The monitoring component ensures that an organization remains in compliance with changing regulations, protecting it from potential legal and financial repercussions.
• Accountability and Transparency: Regular monitoring activities promote accountability at all levels of the organization. When employees know their actions are being observed, they are more likely to adhere to internal controls and ethical standards. This fosters transparency and trust within the organization.
• Efficient Resource Allocation: Monitoring helps organizations allocate resources efficiently. By identifying areas where controls are effective and those that may need improvement, resources can be directed where they are most needed, optimizing the organization’s overall efficiency.
• Enhanced Decision-Making: Data collected through monitoring activities provides valuable insights for management and enables informed decision-making by providing a clear picture of the organization’s risk profile and control effectiveness.

To implement effective monitoring, organizations should consider the following steps:

1. Establish Clear Objectives: Define the objectives of the monitoring process and identify key risk areas that require regular assessment.
2. Develop Monitoring Procedures: Create documented procedures and protocols for monitoring activities, including the frequency and scope of reviews.
3. Assign Responsibilities: Clearly designate responsibilities for monitoring tasks to individuals or teams within the organization.
4. Document Findings: Record and document the findings of monitoring activities, including any identified control deficiencies or areas for improvement.
5. Take Corrective Action: Address identified deficiencies promptly and establish plans for remediation.
6. Report to Management: Provide regular reports to senior management and the board of directors to keep them informed about the state of internal controls.

If you or someone at your organization needs help establishing a system of internal controls, please reach out to Brett Williams, the head of Aprio’s Information Assurance Services and Risk Management team.

Related Resources:

Protect Your Environment with an Effective Control Environment

Making an Effective Risk Assessment Plan

Weak Internal Controls Equal Fraud Opportunities – What You Can Do Now

What is Information Assurance?