Maintaining robust internal controls is essential to ensure operational integrity and compliance for community based institutions. Changes in personnel, processes, or technology can introduce new risks and challenges, making it crucial for institutions to have effective strategies in place to monitor and evaluate their internal controls. Here are some best practices to consider:
1. Conduct regular risk assessments
Regular risk assessments are the cornerstone of a strong internal control system. These assessments help identify potential vulnerabilities and areas that require attention. When there are changes in people, processes, or technology, it's important to reassess risks to ensure that new threats are promptly addressed. This proactive approach allows financial institutions to adapt their controls to the evolving landscape and mitigate risks effectively.
2. Implement continuous monitoring
Continuous monitoring involves the real-time tracking of transactions and activities to detect anomalies and irregularities. By leveraging advanced analytics and automated tools, community based institutions can enhance their ability to monitor a large volume of transactions or activities, focus manual efforts on anomalies, and respond to potential issues swiftly. Continuous monitoring is particularly valuable during periods of change, as it provides ongoing assurance that controls are functioning as intended.
3. Strengthen segregation of duties
Segregation of duties is a fundamental principle of internal control that helps prevent fraud and errors. When there are changes in personnel or systems, it's essential to review and adjust the allocation of responsibilities to maintain proper segregation. This ensures that no single individual has control over all aspects of a transaction, reducing the risk of unauthorized activities. Many banks and credit unions authorize broader user access in times of software conversion and should remember to restrict capabilities post-conversion.
4. Enhance training and awareness
Effective internal controls rely on the knowledge and vigilance of your staff. Providing regular training and raising awareness about the importance of internal controls can empower staff to recognize and report potential issues. When staff understand the objective of their controls, including specific examples of what could go wrong if the control fails, it increases buy-in and effectiveness of control operators. When new processes or technologies are introduced, or when new risk trends are identified, targeted training sessions can help employees understand their roles and responsibilities within the updated control framework. Control operators also have the opportunity to provide feedback on how to make the controls operate more effectively or efficiently.
5. Conduct independent audits
Independent audits provide an objective evaluation of an institution’s internal control system. The internal audit function — whether in-house or co-sourced with an external audit partner — can offer valuable insights and identify areas for improvement. Audits are especially important during times of change, as they provide an unbiased assessment of how well the institution’s controls are adapting to new circumstances. Internal audit scope and coverage should be responsive to the regular risk assessment.
6. Evaluate when errors are identified
When there’s a breakdown identified in the operation of a control, management should pinpoint the root cause of the error and implement actions to correct it. Too often these operating deficiencies are met with band-aid fixes, which often allow additional future errors if the source of the problem isn’t addressed.
7. Foster a culture of accountability
Creating a culture of accountability is essential for the success of internal controls. Encouraging employees to take ownership of their roles and responsibilities fosters a sense of commitment to maintaining control standards. When changes occur, clear communication and leadership support can reinforce the importance of adhering to internal control policies. Executives can demonstrate their commitment to quality by participating in risk assessments, helping prioritize control enhancements, and positive reinforcement when controls operate effectively.
8. Utilize technology solutions
Technology can play a significant role in enhancing internal controls. Implementing robust software solutions for transaction monitoring, data analysis, and reporting can streamline control processes and improve accuracy. For example, many financial institutions have realized benefits of automating elements of their Bank Secrecy Act (BSA) programs, and other compliance-based requirements where software can be trained to mine through a large quantity of data and flag for follow-up items that meet predetermined risk-based criteria. As institutions adopt new technologies, it’s important to ensure that these tools are integrated into the control framework and that staff are trained to use them effectively.
9. Maintain documentation
Keeping documentation to support control evidence is essential, and using technology effectively can help in this area as well. Many document storage solutions offer review capabilities and detail tracking. These tools can notify users of unreviewed or incomplete documents, helping to identify control failures and enabling timely corrective actions. By integrating these tools into the internal control framework, financial institutions can ensure thorough documentation and more efficient control operations.
10. Review and update policies and procedures
Policies and procedures should be regularly reviewed and updated to reflect changes in the institution’s operations and regulatory environment. Clearly defining control procedures can be especially beneficial for management review controls, where the control owner should clearly define what their criteria for investigation, what their review entails, what must be documented as evidence the control operated. When new processes or technologies are introduced, it’s crucial to revise control policies to ensure they remain relevant and effective. Clear and up-to-date documentation helps guide employees and maintain consistency in control practices.
Safeguard your reputation with regular monitoring and evaluation
Community based financial institutions can strengthen internal control systems and navigate changes with confidence with these best practices. Regular monitoring and evaluation of controls help banks and credit unions remain resilient and capable of addressing emerging risks, ultimately safeguarding operations and a very valuable asset — your reputation.
