The importance of internal financial controls

Understanding the crucial role of internal financial controls in banking

By definition, banks are financial institutions licensed to receive deposits and make loans. To hold up their bargain of securely holding assets, banks should therefore deploy comprehensive internal financial controls. When they don’t, repercussions can be far-reaching.

In this blog, we will explore just some of the reasons why internal financial controls are important for all financial institutions from Credit Suisse to FTX.

What are internal financial controls?

Any organisation handling financial assets should have financial controls in place. These can vary in form, taking shape as technology or by simply ensuring that protective policies are adhered to. Ideally, there should be a variety of financial controls in place to ensure that compliance from every angle is assured.

What they amount to are measures which prevent or detect accounting errors along with fraud.

What happens when internal financial controls aren’t implemented?

Now that we know what internal financial controls are, hopefully a few of them will spring to mind such as regular independent financial reviews and ensuring that financial control of an organisation is not limited to one person. If so, no doubt you will already be alarmed by the prospect of them not being enforced by financial institutions (we hope so anyway)!

Unfortunately, throughout history there have been many instances of financial controls going missing within financial institutions despite their significance. However, to emphasise their ongoing importance it seems right to focus on two very recent instances when they were wrongly dismissed.

On 15th March 2023 Credit Suisse announced a delay to their annual financial reporting due to “material weakness”. What this boiled down to was that they had “weakness in our [their] internal control over financial reporting”.

The source of this grave concern has been pinpointed on management not sufficiently maintaining oversight of their internal controls. Consequently, Credit Suisse has admitted that they do not have anything in place to assess and communicate the “severity of deficiencies in a timely manner to those parties responsible for taking corrective action”. Remedies were no doubt quick to be discussed – automated reconciliation software can flag exceptions and notify relevant employees of their required investigation in seconds, making it a likely topic.

Reflecting the importance of internal financial controls, concerns arose imminently on the news breaking, with many fearing that Credit Suisse’s predicament could have easily resulted in:

• Further drastic drops in their share price which by 13:40 (GMT) on 15th March had already fallen to an all-time low of 1.56 Swiss francs

• Other European banks being negatively impacted causing a slide in the FTSE 100

• A “Lehman moment” which is being touted by high-profile economist Nouriel Roubini

Whilst Credit Suisse is a systematically important bank with a history of over 160 years trading, a younger organisation’s recent suffering also came about due to not implementing proper internal financial controls. FTX, a cryptocurrency exchange, crashed into disrepair after existing for just 3 years.

Their descent might have happened rapidly in November 2022 but the investigation into what went wrong is still ongoing, reflecting the scale of issues which can pile up when a blind eye is turned to financial controls.

A board of directors and a CFO not being in place are both listed as being overlooked and causes of unreliable financial statements, mishandling of confidential data, and a lack of centralized control of company data. Another implication was that without the aforementioned suitable internal controls in place, FTX were unable to mitigate their inability to meet deposit requirements which triggered their downfall.

Ultimately, Credit Suisse’s ongoing story and FTX’s now prolific cautionary tale demonstrate that internal financial controls are important to all forms of financial institutions no matter how established they are.

How to implement internal financial controls?

An inevitable result of properly enforced financial controls is that institutions don’t find themselves regularly attending fires which they need to put out.

As mentioned earlier, financial controls come in a variety of forms but some are more integral than others. Arguably one of the most important financial controls which is equal in measure to new vendor verification checks and regularly updating passwords, is that of reconciliation.

Reconciliation is a due diligence process which must be done by companies of all sizes and financial institutions alike. This doesn’t however mean that it is easy. In fact, depending on the volume and complexity of financial transactions which organisations have to reconcile, it can be a very convoluted process which saps an immense amount of resource.

Nevertheless, reconciliation is a must have internal financial control. As a result, an essential investment for any handler of financial assets is automated reconciliation software such as Aurum. With the ability to validate data and flag exceptions in seconds, Aurum:

• Lays the foundation to ensure that all financial reporting is based on correct data

• Flags issues quickly so that investigation and resolutions can take place with urgency

• Highlights audit trails for every transaction which it processes so that institutions’ financial data is audit-ready

• Enables multiple reconciliations to be done daily, rather than creating a bottleneck at the end of financial terms which suck resources away from other important tasks

Stay in control of your finances with Aurum

Financial controls are undeniably important to organisations of any size. While Credit Suisse might have made front-page news due to its size and history, the Association of Certified Fraud Examiner’s 2022 report discovered that small businesses experienced the highest median loss from fraud and that nearly half of all fraud incidents were due to a lack of internal controls.

At Aurum, we help some of the most recognised brands keep their financial data in check. For 20 years we have been transforming the manual process of reconciliation into an automated one which is done in seconds. As financial data matching software specialists, we put businesses in the driving seat with their data, ensuring compliance and control with a quality product tailored for each client’s needs.

Interested in learning more about how automated reconciliation with Aurum can keep your internal financial controls operating optimally? Take a read of the original blog post, amongst others, over at aurum.solutions.