How to Setup a Controlling Department

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This article delves into the importance and the step by step process of setting up a controlling department. It includes the 1) introduction, 2) main tasks of the controlling department, 3) setting up a controlling department, 4) considerations while creating the controlling department, 5) implementation of the Internal Control System, and 6) how to enhance your Internal Control System.

INTRODUCTION

The controlling department is a crucial part of the corporate governance system and plays a vital role in distinguishing, reducing and controlling risk. There are significant measures taken to safeguard stockholders’ interests, as well as the company’s assets.

The controlling department also facilitates the success of the organizations operations by ensuring the reliability of monetary information as well as by agreeing to and following the laws, rules and regulations. The control system of accounting is a crucial part of the ICS (Internal Control System).

Although the controlling department decreases the risk yet it cannot protect against poor judgment and human error, or manage unforeseeable conditions. The Internal Control System, therefore, provides a safeguard that the organization won’t be impeded in achieving its business goals, or in the orderly and legitimate conduct of its operations.

The controlling department plays a role as a business agent for the management at all levels of the business. The controlling role is carried out both at central level in a group and at an organizational level, with a few main focus areas.

MAIN TASKS OF CONTROLLING DEPARTMENT

The controlling department provides the following services:

  • Preparing important information for the management. This includes quarterly reporting, preparing of updates prior to BoD (Board of Directors) meetings and any other information that needs to be presented to management prior to decision-making.
  • Supplying data for decision-making processes. This can include financial information, as well as sales/purchase numbers and can also include HR stats. Any and all data that might be needed to help make a responsible decision should be available through the controlling department.
  • Assessing financial numbers and data concerning employees, structures, and business matters.
  • Defining and recognizing significant performance indicators. Being able to review reports and understand trends so as to present them to the BoD in a timely fashion.
  • Providing instruments (e.g. SAP / ETHIS) as well as systems.
  • Managing reports specifically for external audiences. This includes external reports like annual reports.
  • Making quarterly reports. Quarterly reports are presented to the BoD and external stakeholders as well. These must be created after reviewing data and performance for the entire quarter.
  • Supervising the annual budgeting process. The controlling department works closely with the financial departments to ensure a concrete budget is established for the year. It might be necessary for the controlling department to communicate with all company departments while working on the budget. The controlling department will eventually be tracking how closely the budget is followed – and reporting on it – so they must be involved in the creation as well.
  • Working towards achieving transparency and streamlining systems and processes.

SETTING UP A CONTROLLING DEPARTMENT

In order to set up a controlling system in an organization, you must first decide on the objectives and anticipated goals before using the system. Also, make sure that certain requirements are fulfilled before you setup the controlling department. This includes writing down the responsibilities of the department as a whole,  the responsibilities for key people within the department, and the policies the department will follow.

The Role of the ICS Department

For any organization, it is important to carry out the following functions successfully.

  • The ICS department must exercise authority and control on internal book-keeping.
  • It should provide reports along with suggestions on the accounts, budgetary, and on the controlling procedures that need to be adopted by company.
  • It should control and manage the financial reports along with relevant documents.

Points to keep in mind before setting up a controlling department

The following tips can help in setting up your organization’s Internal Control System.

  • Make sure there are approval and commitment from the Board and Management: Each internal controlling system needs to have the support and commitment of the Board and Management.
  • Identify obvious needs and have systematic processes for the ICS: The organization needs to define fundamental concepts of how the system will work. A standardized approach guarantees that the staff works along similar lines that result in a similar impact.
  • Move step-by-step: An ICS should be modified according to the organization itself. It is important for the organization to establish, evaluate and modify the ICS that also covers all aspects of the business.
  • Define roles and duties: Duties for particular controls ought to be clearly designated to a department or an individual to ensure efficiency. Within this context, the company needs to hire a controlling officer.
  • Train all staff connected to the control system: Employee training is a key factor in guaranteeing the efficiency of any Internal Control System. Everybody needs to comprehend that being part of the internal controlling system requires they familiarize themselves with major risks, or alterations that might need to be made in any given situation. This will help ensure that corresponding controls can be put into practice.
  • Make sure resources are available: Improving or establishing an ICS means making substantial resources available throughout the process. Whether this is in the form of software, HR or financial leeway to make necessary purchases, the department needs to have the resources required to function properly.
  • Prepare the Internal Control System for potential problems: New problems come up and existing ones must be catered to. Thus, the controls should also be modified accordingly. The internal control system is only going to remain effective if risks are evaluated continuously and necessary action is taken accordingly.
  • Effectiveness of the Control System supervised by the Board and Management: The department should be supervised on an ongoing basis to make sure that controls are effectively carried out. The Board must ensure that the control system is frequently updated.
  • Understand that there’s no such thing as complete security: A Controlling System always involves evaluating potential risks that a company is exposed to and also predicting expenses. Due to various reasons, it’s impossible to reduce every risk since risks cannot completely be eliminated. The most important thing would be that the company’s Board and Management fully understand this risk.

CONSIDERATIONS WHILE CREATING THE CONTROLLING DEPARTMENT

The controlling department should not be setup without proper planning. From commitment at the top-level, to ensuring everyone understands their responsibilities, it is important to keep several things in mind while adding this department to your organization.

Commitment at the Top Level

Direct participation of the top management in internal control is an important factor for the company’s success. For control management, it helps in

  1. creating and helping the standard committee,
  2. creating and determining recommendations and goals,
  3. delivering assets and training,
  4. supervising implementation at every level of the company, and
  5. assessing and revising in accordance with the results accomplished.

Commitment to Controlling Department at every Organizational Level

Responsibilities of the Board of Directors

The Board of Directors has ultimate responsibility for a company’s Internal Control system department. Here is a list of responsibilities for the board:

  • It should carefully set recommendations and update the guidelines accordingly.
  • Observe the organizational risks identified and review them. They must decide if the ICS is able to control these risks.
  • After half a year, when the Annual Report as well as the First-Half Report is approved, assess the strength of the Group’s Internal Control System to make sure that the principal risks faced by the organization are being adequately dealt with.
  • To correctly execute the duties designated, the Board of Directors will need to depend on the appropriate resources to oversee the Control System. First and foremost, it must determine a control committee that can help them by delivering recommendations and plans for the Internal Control System. It appoints individuals from the Committee and chooses its Chairman within the committee membership
  • In addition, it must hire the ICS Compliance officer, and evaluate his independence and professional capability.

Responsibilities of Employees

All employees, according to the duties designated to them by the company, must also carry out a few tasks for internal controlling and follow a set criterion.

If these employees have been hired for the ICS, then it can be assumed that they meet a certain company criteria because of which they can be trusted with new responsibilities that come with the control system. All other employees must be trained and taught their roles and responsibilities towards the ICS.

Division of duties

No one person should assess the accounting process, nor does one staff member handle every facet of a transaction. However, if an individual worker produces assessments, then another employee should cross-check. Switch tasks each month and it’s recommended to avoid letting one employee hold all control of any essential process.

When walking in the office, keep yourself familiar with what the employees do so that they are aware that they are being watched. This also reduces communication barrier with employees. By making regular rounds, employees remain cautious and they keep focused on their work.

Assessment of the Efficiency and Effectiveness of the Controlling Department

A periodic review of the efficiency of the ICS should be carried out. Such a periodic review can be a task delegated to the Board of Directors that helps the Internal Control Committee. In undertaking this evaluation, the directors will be conscious in not just reviewing the working system of an ICS within the company but also regularly assessing the structure of the Internal Control System, its competence, efficiency as well as actual functioning.

The Board of Directors should evaluate the ICS every six months. They can go through the reviews submitted by IC Compliance Officer, evaluating (i) when the present structure in the ICS was efficient in achieving the goals (ii) whether any reported flaws have a noteworthy difference in the system.

Each year after the approval of the Annual Report is given by the Board of Directors, they will also:

  1. Browse the major organizational risks given for consideration and review as to how they have been recognized, examined and handled. Particularly, it must consider the alterations.
  2. Review the strength of the Internal Control System in managing the risks mentioned above, particularly when it comes to reporting any significant mistakes or flaws in an internal control.
  3. Bear in mind which actions are taken or should instantly be remedied in case of flaws.
  4. Prepare any other recommendations, processes and behavior rules that will adequately counteract new risks or previous ones that weren’t handled properly.

HOW TO ENHANCE YOUR INTERNAL CONTROL SYSTEM?

Responding to these questions can help review your Internal Control System. It can also provide possibilities to enhance your Internal Control System.

  1. Do you have goals and requirements to improve your ICS? Rather than jumping into setting up a controlling department, spend time planning the goals and responsibilities of said department. Include the administration in this step so the new department has the complete support of the management.
  2. Have you hired specifically for the ICS? Hire specifically if you do not have the skills in-house, rather than putting someone without adequate experience in charge of such an important function.
  3. What is the systematic technique of determining and assessing risks, and also have these risks/checks been recorded?
  4. Have the processes and controls both been recorded?
  5. Are you sure that controls established cover any material risks?
  6. Are controls modifiable if the risk situation changes?
  7. Does the company supervise if controls have really been completed and are clearly recorded?
  8. Does the Board of Directors receive regular reports on internal controls? Establish a timeline for reporting, and ensure that the new controlling department follows it. Without proper reporting, your Board of Directors will be unable to keep track of what’s happening.
  9. Is the standard of internal controls examined periodically when it comes to the needs given by the Directors?
  10. Have the necessary measures to address flaws been recognized and taken within the Internal Control System, and was the implementation of those measures supervised?

Every organization has different departments in terms of its size, degree of centralization and complexity. Thus, there is no one method of ICS which can be applied universally. Therefore, managers of every department in a company should use a guideline that could assist them in making their internal control systems, which are consistent with their company’s objectives and goals while keeping in mind the costs involved in implementing them.

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