- Another aspect of short-term financial
management is internal controls.
I admit that this seems like a boring label,
internal controls, like something
only accountants would care about,
but internal control is the label given
to the important systems in place inside a company
to make sure that the company does what it's supposed to do,
that it satisfies its obligations
and that everything gets recorded.
If you don't have a data collection system,
if you don't have a paper trail,
then you are not able to manage your processes at all.
You may have heard of the Sarbanes-Oxley Act.
This company regulation
was passed in the United States in 2002 in the wake
of several large financial and accounting scandals.
A key provision of the Sarbanes-Oxley Act
is that each publicly-traded US company must have a system
of internal controls in place
and the existence of these controls has
to be verified by an external auditor.
To repeat, internal controls make sure
that companies do what they are supposed to do
and that everything gets recorded.
Let me give you some examples
of good internal control practices.
One example is the separation of duties.
Think of separation of duties like this.
Hands that touch assets should not also be allowed
to touch the records where we keep track of those assets.
Imagine a warehouse in a manufacturing facility
where you keep the raw materials.
If a person has access to the raw materials
and also has access to the records where we keep track
of which raw materials are there,
the person could steal raw materials
and cover that up by doctoring the books.
Now, another example of an internal control practice
is the physical protection of assets,
cash gets locked away, computers are password-protected.
A few years ago, I heard an executive
of a high-tech company in the United States talk about
the importance of internal controls.
This person said that one
of the most important assets
of this high-tech company is their intellectual property.
So I asked, how do you protect
this intellectual property when you're traveling?
Presumably, your personal computer holds corporate secrets.
This corporate executive replied our intellectual property
is so important that when I travel,
company policy does not allow me to take my laptop with me.
I'm given a special laptop
containing my presentation files and nothing else.
This restrictive laptop policy is an example
of an internal control in place to protect company assets,
intellectual property in this case.
Another aspect of internal controls is independent checks.
Employees never know when an auditor will come,
either an internal auditor from inside a company
or an external auditor from outside the company.
Another internal control
is that companies sometimes
have systems in place requiring employees
to take regular vacations.
This control exists because
if an employee is committing fraud or theft,
the employee can cover it up because he
or she is always there to smooth over
any questions that might arise.
Internal controls protect the assets,
make sure that the records are complete
and also make sure that a company satisfies its obligations.