The RBT CPAs Advisory Services team receives a lot of inquiries about internal financial controls, especially as a growing number of our manufacturing clients explore and implement Enterprise Resource Planning (ERP) systems. So, we figured we’d do an article on the topic. Take a look as financial controls can help any business – whether it’s adopting an ERP or not – protect its assets, promote transparency, provide data to make business decisions, and instill stakeholder and investor trust.

Starting with the basics…The Sarbanes-Oxley Act (SOX), enacted in 2002, was a regulatory response to major corporate and accounting scandals. SOX Section 404 mandates publicly traded companies in the U.S. establish, document, test, and maintain internal controls and procedures for financial reporting. Among other things, these companies must produce an annual report where management asserts the effectiveness of internal controls.

Private companies looking to go public must be SOX-compliant before an initial public offering. Although not mandatory, many nonprofits voluntarily adopt SOX provisions as best practices. New York State law requires state agencies and public authorities to maintain a system of internal controls to help safeguard public assets and promote accountability in government.

Internal financial controls are processes designed to help prevent fraud, enhance reliability of financial statements, reduce the risk of unexpected financial losses, and ensure compliance with laws and regulations. They include procedures for authorization, record keeping, reconciliations, and auditing. They also contribute to effective management by providing reliable data for decision-making.

Although a business can consider adopting financial controls at any time, they are particularly important as part of ERP implementations. ERP systems eliminate data silos, reducing the risk of errors and fraud while promoting financial integrity and transparency. ERPs enable real-time tracking of financial transactions. So, instead of waiting for end-of-period financial reports, managers can proactively monitor financial processes, promptly detecting and addressing any anomalies. What’s more, by automating routine tasks, ERP systems minimize manual intervention, reducing the risk of errors and freeing up time for more strategic activities. Based on our advisory services teams’ experiences with ERP implementations, the one non-negotiable recommendation we would make is to define internal financial controls as part of the up-front planning process. Trying to develop these controls concurrent with ERP implementation or after the fact can lead to higher implementation costs, longer project timelines, and extended business disruption.

If your business is going to take the time and expense to implement an ERP, defining financial controls upfront is critical to maximizing your return on investment. Even if your business isn’t currently considering an ERP, internal financial controls can provide added protection for your business, while increasing trust among stakeholders, including financial institutions, investors, and lenders.

Interested in learning more? For business advice, accounting, audit, and tax services, RBT CPAs professionals are always available. Give us a call.

RBT CPAs is proud to say 100% of its work is prepared in America. Our company does not offshore work, so you always know who is handling your confidential financial data.