Financial controls are policies and procedures used to monitor and manage financial resources. They help protect financial assets from misuse and help ensure accurate, reliable financial reporting.

Businesses typically track their financial resources with three statements: the income statement, balance sheet and cash flow statement. These financial statements provide interested parties (such as traders, investors, auditors and regulators) with vital information concerning a company’s financial health, future performance and overall value.

Financial controls help guarantee that these statements are reliable and error-free. They are also risk management tools, serving as a first line of defense against financial abuse within a company. For example, financial controls can detect and even deter fraudulent activity or the misappropriation of assets. Also, financial controls can help organizations achieve operational efficiency through better financial management.

Common examples of financial controls include segregation of duties, access controls, reconciliations and policy revisions. They can be preventive, detective or corrective; manual or automated; and performed ad hoc or as scheduled.

Effective financial controls can help businesses maintain compliance, achieve operational efficiency and mitigate fraudulent activity.

Accurate financial reporting helps organizations meet compliance obligations. Financial controls give stakeholders confidence that the business’s records are reliable and accurate, which reduces the risks of noncompliance, such as steep sanctions and fines.

For example, in response to major accounting scandals in the early 2000s, the US passed a federal law, called the Sarbanes-Oxley Act, designed to prevent corporate fraud. The act contains strict requirements pertaining to financial recordkeeping and criminal penalties for violations.  

Businesses across sectors face increasing pressure from stakeholders to achieve greater operational efficiency. Financial controls can help streamline, monitor and manage cash flows, budgets and financial forecasts. This reliable financial data enables informed decision-making about resource allocation, major expenditures and cost management for more efficient business operations.

Financial controls can help detect malicious activity. They provide regular oversight and verification procedures to help curb fraud, embezzlement, theft and other instances of financial misuse. Also, the knowledge that an organization is monitoring all financial processes can help deter potential offenders from attempting anything nefarious in the first place.

Internal financial controls are typically divided into three categories: preventive, detective and corrective.

Preventive controls are used to reduce the risk of errors, fraud and fund misappropriation. They include policies and practices such as:

• Preapprovals: Management verifies or authorizes that an employee can perform a certain financial activity or complete financial transactions. For example, accounts payable systems often require manager approval to distribute reimbursements.
  
  
• Access controls:  Restricted access to physical financial assets (such as cash) and virtual financial systems (such as accounting systems or bookkeeping software). For example, requiring passwords or other security verifications to view, edit or submit sensitive financial information.
  
  
• Segregation of duties: Distributing financial duties among several people. For example, petty cash policies might require that different people perform cash disbursements, reconcile the account and replenish the account.

Detective controls are used to detect anomalies, errors or fraud in financial reports. They include policies and practices such as:

• Audits: Objective and periodic reviews meant to evaluate and improve an organization’s internal controls. Audits can be internal or external. For example, auditors might compare the best practice control environment to the one that has been documented.
  
  
• Account reconciliations: Comparing internal financial records with external financial documents to help ensure accuracy and consistency. For example, reconciling might help ensure that the general ledger matches company credit card or bank statements.
  
  
• Variance analysis: A method of comparing planned and actual financial performance to find discrepancies. For example, a company might analyze variance in budgets, labor costs or sales.
  

Corrective controls are used to fix the errors or discrepancies found in financial reporting, and help ensure they are not repeated. They include policies and practices such as:

• Error correction: Establishing procedures for correcting errors found in accounting records. For example, rectifying errors found in a cash payments journal entry and adjusting any affected accounts.
  
  
• Policy revisions: Adjusting existing financial control policies to better address new risks and needs, or to improve effectiveness. This control might require separate risk assessments. For example, an internal audit might reveal weak access control systems that the organization should take corrective action to strengthen.
  
  
• Training and education: Regular training and information sharing to help ensure accounting teams and other employees remain up to date on the financial management landscape and any new business processes. For example, organizations can set up information sessions about new laws or regulations that might affect the business.
  

There are several software options that can help organizations improve their financial controls, including:

• Enterprise resource planning (ERP) software
• Governance, risk and compliance (GRC) software
• Financial planning and analysis (FP&A) software

ERP systems can manage and streamline an organization’s financial functions, processes and workflows with automation and integration. Traditional accounting software often lacks real-time data accessibility. But ERPs centralize and store crucial financial information in one database (sometimes in the cloud), including data about vendor payments, cash management and account reconciliation. They can also track accounts payable (AP) and accounts receivable (AR), perform financial analysis and generate reports.

Specialized GRC software can help ensure a company is meeting compliance and risk standards. Features of GRC software can include management of documents, risk data, workflows and audits. Effective GRC tools create and distribute policies and controls, mapping them to regulations and compliance requirements. They also help assess whether financial controls have been deployed, are functioning correctly and are improving risk assessment and mitigation. 

FP&A includes financial modeling, budgeting and forecasting to support financial analysis and improve decision-making. FP&A software allows businesses to alter plans, reforecast or modify budgets in real time and integrate planning across business units to speed up decision-making. It improves the accuracy and reliability of plans and forecasts.