Assignment: Internal Control in Hospitality
Administration
Dr: Ahmed Abdel Moaty
Student Name: Ahmed Ehab Helmy Rizk
Second-year of Hotel Management Department
The Importance of Internal Control System
Good internal controls are essential to assuring the accomplishment of goals and
objectives. They provide reliable financial reporting for management decisions.
They ensure compliance with applicable laws and regulations to avoid the risk
of public scandals. Poor or excessive internal controls reduce productivity,
increase the complexity of processing transactions, increase the time required to
process transactions and add no value to the activities.
Good internal controls help ensure efficient and effective operations that
accomplish the goals of the unit and still protect employees and assets.
Internal Controls are your first line of defense. Like washing your hands or
locking your front door, they’re the processes that keep bad actors at bay. As a
result, you cannot understate the importance of internal controls.
When Implemented effectively, internal controls promote compliance with
relevant regulations, secure company systems and data, and contribute to real-
time reporting. However, these are only a few reasons why internal controls are
important.
Internal controls are important because they protect an organization’s systems,
data and assets. As significant as security is, the importance of strong internal
control is even further reaching than that.
An Effective framework for internal controls can help organizations:
1. Mitigate risk
This is one of the most — if not the most — important things internal controls
do. In fact, this is why internal controls exist: to put guardrails on business
activities that keep the organization on track and ahead of risk. Without internal
controls, organizations can’t assure regulators, investors or even the board that
systems, data and financial statements are secure and accurate. All risk-reducing
practices trace back to internal controls.
2. Implement processes
When internal controls are in place, employees know the processes and
procedures they should follow. This strengthens the company because
employees understand expectations and can securely engage with systems and
data.
3. Optimize processes
Another reason why internal controls are important is that they can lead to
process improvements. Controls apply a risk-based lens to all activities,
empowering risk teams to hone in on processes that contribute to strategic
objectives and mitigate risk. This ultimately leads to a more productive, more
risk-aware company culture.
4. Boost efficiency
With internal controls, there’s only one right way to engage with any system,
data set or repetitive process. That means employees only leverage their most
efficient option rather than creating their own processes as they go. Automated
internal controls can further streamline activities, leaving teams free to pursue
more strategic work that directly contributes to company objectives.
5. Increase information accuracy
Data accuracy is critical for any organization. Without it, boards make decisions
based on faulty information, leading to strategies that can do the business more
harm than good. Internal controls are important because they offer guidelines
for collecting, storing and reporting information. This creates systems for
accurate, timely and reliable data for boards and investors alike.
6. Reduce fraud
A key tenet of internal controls is segregating duties, meaning the person
undertaking an action isn’t also the person approving it. For example, an
employee purchasing new laptops for the sales department shouldn’t be the
same employee who approves the purchase order. This ensures that all actions
are beneficial to the business and insulated from fraud.
7. Improve financial reporting
Financial statements can be challenging to produce if the organization’s
transactions aren’t regularly available. Having controls around how and when
employees should report transactions paves the way for more accurate financial
statements, enabling leadership to make more informed decisions involving the
company’s finances.
8. Identify errors
Mistakes happen. It’s all too easy to transpose digits or enter a figure on the
wrong line. Internal controls like automation are important because they help
organizations catch and fix those errors before they cause costly reputational
damage.
9. Ensure regulatory compliance
Internal controls aren’t just nice to have; they’re a regulatory requirement.
Regulations like the Sarbanes-oxley Act require organizations to implement
internal controls for financial reporting. Disclosures about these controls must
also appear in the annual report. Organizations with internal controls can more
easily prove their SOX Compliance and show investors they utilize sound
financial practices.
10. Avoid conflicts of interest
Separation of duties — spreading responsibility for financial processes across
multiple employees — is a key tenet of effective internal controls. When
multiple employees verify financial data, it’s less likely that any of them will
mismanage finances — either accidentally or for their own gain. This produces
accurate financial statements that boards can reference, and investors can trust.
11. Prevent harmful scandals
Organizations suffer far-reaching reputational damages when scandals come to
light, especially those that harm investor finances. For example, Enron was
found guilty of hiding debts in 2001, and that reputation followed them for
decades — largely because they lost shareholders millions of dollars in the
process. Accounting internal controls create a hostile environment for
misreporting and other types of fraud, leading to more trustworthy practices.
12. Streamline external audit
Like internal controls themselves, external audits are a regulatory requirement.
Though you can’t avoid an audit, internal controls can increase the chances of
winning a clear report. What’s more, if you can prove the extent of your internal
controls system, you may reduce the audit scope — leading to reduced audit
time and fees.
13. Achieve corporate goals
Good internal controls are mapped to corporate goals and objectives. Risk teams
will identify the practices the organization needs to achieve those goals and then
design internal controls that allow those practices to be safely completed.
Internal controls provide cohesion and consistency to establish order and
protocol within a business. Business owners establish protocols and set
boundaries around how the procedure is followed and regularly review controls
for efficacy and accuracy. An established internal control process outlines how
the company handles financial transactions as well as the assignment of
administrative and management tasks. When protocol and procedure are clear,
employees understand what is expected of them and how to complete day-to-
day tasks.
Here are 12 reasons internal controls are important to protect your business,
clients and assets.
1. It establishes the processes
Internal controls outline employee protocol and procedures so employees aren't
left guessing how to perform their job duties or which procedure to follow.
Changes to internal controls are reported to employees so they are promptly
informed of changes to improve efficiency and reduce errors. Internal controls
are stringently documented to improve employee understanding and compliance
of protocols which can increase productivity and boost [Link]: The
Lighting Co. publishes an annual update of its employee handbook and
documents who receives and reviews the handbook. The company schedules
departmental meetings to answer questions about changes and review new
procedures.
2. It improves process performance
As processes are implemented, the continuous monitoring of their effectiveness
helps management make decisions about whether the process is working or if it
needs additional attention. When processes are improved, so is the accuracy
of financial reporting which management may rely on to make informed
business decisions or [Link]: In 2020, The Lighting Co.'s revenue
was down by 30% because of a reduction of in-store traffic. Management
decides to focus on the company's website to increase web traffic and boost
online sales.
3. It improves operational efficiency
Internal controls can improve the efficiency of operations by removing
unnecessary or duplicate steps in a procedure or process. This might include
automation of manual controls or combining functions cost-effectively.
Improved operational efficiency allows management to receive timely
information to verify current operations are meeting the company's
[Link]: The Lighting Co. has maintained several email addresses
monitored by different employees to communicate with customers, vendors and
address social media requests. After reporting a reduction in email
subscriptions, the company decides to combine customer emails and social
media to the same inbox with one employee handling both.
4. It keeps duties separated
Internal controls ensure the separation of duties to avoid conflicts of interest and
reduce the chances of financial mismanagement. Separating duties establishes a
system of checks and balances so no one person has access to every piece of
[Link]: Janet works in accounts receivable and has access to the
financial transactions of clients. Internal controls dictate that Janet cannot also
handle accounts payable so that the sharing of information is controlled and the
risk for fraud is reduced.
5. It mitigates business risk
One function of internal controls is to limit the company's losses due to
misappropriated or mishandled funds by employees or management. Internal
controls reduce loss by identifying fraud or financial loss through theft or other
illegal means. This may include controlling the reconciliation of bank
statements as well as conducting internal audits to safeguard inventory and
assets. Some internal controls may require the approval of vendors or
employees before work [Link]: The Lighting Co. contracts with the
local government to provide light fixtures to city government buildings or
structures. Internal controls require employees and vendors to pass background
checks before they can work on government projects.
6. It organizes information
Organized data means the company is prepared in the event of litigation or
external audit. Internal controls protect company and client interests by creating
systems to file client data or documents, or by implementing restrictions such as
requiring passwords to access data. Organizing information improves efficiency
by ensuring financial data is secure yet accessible.
7. It produces timely financial statements
Timely financial statements not only aid management in making decisions about
the company's future, but also protect stakeholders and the company's
reputation. Regular financial statements help identify and correct small errors
before they become bigger problems while building trust in the company and
proving its transparency.
8. It reduces errors
Internal controls help in the reduction of errors by defining protocols and
procedures to reduce employee mistakes and make improvements as needed.
The company reduces income losses and marks on its reputation by effectively
training employees to reduce errors or misunderstandings. Internal controls such
as employee training may begin with an orientation and continue with ongoing
training programs such as learning a new computer system or work process.
9. It improves accountability
With internal controls that designate roles, key members are responsible for
monitoring and reporting throughout the year so errors are identified and
improvements implemented promptly. Accountability is achieved when clear
protocols as to how data is transmitted, recorded, shared and reported are
outlined. Improved accountability means the company stays in compliance with
regulatory and statutory filing requirements.
10. It stabilizes operations
When protocols for company operation are in place, the business is better able
to meet company objectives. Management has better control of how the
company is operating and whether or not it is following procedures. A stable
operation defines employee roles, manages information effectively and has
detailed processes in place to identify issues and make
[Link]: The Lighting Co.'s annual report shows that protocols
are not being followed for employee time-off requests. The company analyzes
the data to determine if the procedure is obsolete, whether steps can be removed
or combined or how to implement a new process to ensure protocol is followed
while remaining fair to the employees.
11. It reduces audit fees
Established internal controls may reduce external audit fees by providing a clear
structure of how internal controls are implemented and their result. Clearly
mandated internal controls reduce the need for revisions or an entire internal
controls rebuild following an external audit and review.
12. It recognizes the Sarbanes-Oxley Act
The Sarbanes-Oxley Act was established for accountability purposes and to
maintain internal controls for financial reporting. The act is a federal law that
protects investors and ensures corporations provide accurate and reliable
financial disclosures. Public companies large and small are required to include
details of their internal controls and file an annual report. By following the
Sarbanes-Oxley Act, companies raise confidence with investors and prove the
company's integrity in its management of financial data.
The overall purpose of internal controls is to help a department achieve its
mission and accomplish certain goals and objectives.
An effective internal control system helps a department to:
Promote orderly, economical, efficient, and effective operations
Produce quality products and services consistent with the department’s
mission
Safeguard resources against loss due to waste, abuse, mismanagement,
errors, and fraud
Promote adherence to statutes, regulations, bulletins, and procedures
Develop and maintain reliable financial and management data, and
accurately report that data in a timely manner.
A properly designed internal control system will involve all departments of an
organization to improve their processes.
Implement separation of duties among different employees to reduce the
risk of error or inappropriate actions; ensure no one person has complete
control over all aspects of any financial transaction
Ensure records are routinely reviewed and reconciled by someone other
than the preparer to determine that transactions have been processed
accurately and appropriately
Ensure that cash, equipment, inventories, and other property are secured
physically, counted periodically, and compared to control records; limit
access only to authorized persons
Provide employees with the appropriate training, direction, and
supervision to ensure they have the necessary knowledge and skills to
carry out their duties; inform employees of the proper channels for
reporting suspected improprieties
Make sure company-wide and department-level policies and procedures
are formalized, documented, communicated, and readily available to
employees; document day-to-day operating procedures and practices to
provide staff with guidance to ensure management’s directives are carried
out and to help maintain continuity of operations in the event of
prolonged employee absences or turnover.
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