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Running a business

Understanding Limitations of Internal Controls

Internal controls help you keep your business operating smoothly and ensures that your financial records can be trusted. They’re an important part in building a trustworthy and reliable company. However, internal controls can’t guarantee that everything will go according to plan. Although they’re set in place to make certain things happen, your internal controls have limitations that can make them ineffective.


Your internal control systems can be overcome if multiple employees work together to perform fraud. Although each employee may face internal controls that limit what they can do by themselves, they can go around this limit by pairing with someone who can. One of your employees may be authorized to enter a voucher into your accounting system but isn’t allowed to print cheques. Another employee may be authorized to print cheques but can’t set up to enter vouchers. If these two employees work together, they can overcome the limits each one faces individually to produce a fake cheque. There’s no way to overcome collusion other than having trustworthy employees.

Incorrect Judgment

A lot of your internal controls are set up based on your professional judgment. You put cash in your vault because you judge cash to be something someone would want to steal. You hire staff based on how you evaluate their character. You judge what responsibilities to give each of your workers based on how well you believe they can do their jobs. Because setting up internal controls isn’t an exact science, you have to rely on the information you have and try to set up the best rules and processes. Sometimes, your professional judgment is wrong, you fail to set up an internal control, or you don’t assign the right task to the right employee. Continually research and learn the best internal control practices to overcome this limitation.

Failure to Train Employees

Your internal controls are only as strong as your employees’ understanding about what’s going on. Training your employees on what they’re supposed to do is a critical function of making internal controls work. This training should also tell your workers what they are not allowed to do. Although your employees don’t need to know the reasons why you’re setting up each internal control, you must let them know what their duty is, the purpose of the limits put on them, and the consequences if they overcome these limits. Employees should also know general practices on how to uphold internal controls. For example, everyone in your business should know their passwords, how to set strong passwords, and that they shouldn’t keep written trails of their login information.

Management Override

A common practice of internal controls is to override the control. Although you may have policies and procedures in place, there may be exceptions to the rule where people are allowed to skip certain steps. For example, imagine that you have an employee with the authorization to approve invoices up to $5,000. If you’re on vacation and an important invoice arrives for $6,000, the employee may decide to override the company’s internal control policy to approve the invoice and get it paid. Although these situations may not produce bad results, an auditor will want to see you using controls consistently. Having an internal auditor can help you understand where your controls are falling short or being misused. The first step is to understand that your internal controls can be overcome. Although it’s great to have internal controls, there are limits in all controls, and you must continually evaluate whether they’re working correctly.

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