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 3 main objectives for well-developed internal controls.
Each objective contains 5 key components.
There are 7 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 with the goal of achieving 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 3 main objectives contain five key components: control environment, risk assessment, control activities, communication, and 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 to establish and monitor their specific 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, as well as to maintaining compliance. As conditions constantly change, periodic and systematic risk assessment and analysis is required.
Component #3: Control Activities
Control activities are the actual policies and procedures within internal control. Examples include reviews, supervisory authorizations, separation of duties, as well as written documentation and record-keeping. Control activities are designed to reasonably ensure that actions are taken to address risk and ensure compliance throughout the organization. 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 individual 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. This means people not only understand their role within internal control but how it relates to what others are doing and the organization as a whole. Effective communication not only includes mechanisms for management to communicate with employees but a clear channel for employees to communicate with management as well.
Component #5: Monitoring
In order to be effective, internal controls must be consistently and regularly monitored. Monitoring should be built into daily operations in addition to regular and periodic supervisory monitoring. The degree, scope, and regularity of monitoring internal controls are dictated by grant specifications and requirements. 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 in order to make continuous improvements. The primary benefits of well-developed internal controls include:
7 Primary Benefits of Well-developed Internal Controls
- Benefit #1: Help to ensure grant funding is properly used
- 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/
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Lucy Morgan CPA, MBA
CEO, Compliance Warrior
Author of “Decoding Grant Management-The Ultimate Success Guide to the Federal Grant Regulations in 2 CFR Part 200” The 2nd Edition is now available on Amazon in Paperback and Kindle versions.