Here is the minimalist guide to internal controls:
- Just remember 3-5-7.
Let’s face it, understanding internal controls is critical to continued grant funding.
A lack of well-developed internal controls can lead to costs being disallowed and even suspension and debarment from future grants.
Does it seem overwhelming?
Look at our simplified approach of 3-5-7.
The Simplified 3-5-7 Guide to Internal Controls:
There are three main objectives for well-developed internal controls.
Each objective contains five key components.
There are seven primary benefits of effective internal controls.
Let’s break that down step-by-step:
3 Main Objectives for Internal Controls
Well-developed internal controls are a critical defense for reducing the risk of fraud, waste, or abuse of grant funding.
According to the Standards for Internal Control within the Federal Government, internal controls should be designed to achieve three main objectives:
- Objective # 1: Effectiveness and efficiency of operations
- Objective #2: Reliability of financial reporting
- Objective #3: Compliance with applicable laws and regulations
Well-developed internal controls meeting these three main objectives contain five key components:
- Control environment
- Risk assessment
- Control activities
- Communication
- Monitoring
5 Key Components for Internal Control Objectives
Component #1: Control Environment
An organization’s environment is established by its leadership from the top down.
Leaders of each area, activity, and department are responsible for establishing and monitoring their control environment.
Component #2: Risk Assessment
Organizations must assess both external and internal risks.
Risk assessment requires identifying and analyzing risks to achieving the goals and objectives of the funded program or project and maintaining compliance.
As conditions constantly change, periodic and systematic risk assessment and analysis are required.
Component #3: Control Activities
Control activities are the actual policies and procedures within internal control.
Examples include reviews, supervisory authorizations, separation of duties, written documentation, and record-keeping.
Control activities are designed to reasonably ensure that actions are taken to address risk and ensure organizational compliance.
These activities are implemented at all levels and within all functions of the organization.
Component #4: Effective Communication
Every employee (and even volunteers) must clearly understand their role and its place in the control functions.
Therefore, effective communication mechanisms must be present to collect and distribute information in all directions within the organization.
Good communication means people understand their role within internal control and how it relates to what others are doing and the organization as a whole.
Effective communication includes mechanisms for management to communicate with employees and a clear channel for employees to communicate with management.
Component #5: Monitoring
Internal controls must be consistently and regularly monitored to be effective.
Monitoring activities should be built into daily operations and regular and periodic supervisory monitoring.
Grant specifications and requirements dictate the degree, scope, and regularity of monitoring internal controls.
This review should include identifying relevant risks to meeting the goals and objectives of the grant while strengthening the internal controls at the organization.
Well-developed internal controls are consistently assessed and evaluated to make continuous improvements.
The primary benefits of well-developed internal controls include the following:
7 Primary Benefits of Well-developed Internal Controls
- Benefit #1: Help to ensure grant funding is used correctly
- Benefit #2: Detect and help prevent errors
- Benefit #3: Reduce the risk of direct and indirect fraud
- Benefit #4: Contribute to accounting accuracy
- Benefit #5: Assist grantee in providing timely financial and management reports to grantor
- Benefit #6: Help ensure policies, specifications, and requirements of the grant are met
- Benefit #7: Foster taxpayer confidence that public funds are safeguarded and spent as intended
The 3-5-7 guide to internal controls can help you understand what a well-developed control system looks like and avoid the unpleasant reality of poor grant management.
How does your organization stack up?
- P.S. Want to learn more about assessing risk for your grant? Check out my article https://blog.myfedtrainer.com/10-areas-of-grant-risk-to-consider/
