Are your internal controls helping you?

• Author: Salerno, Paul
• Position: PrivateCOMPANIES

Although the Sarbanes Oxley Act only applies to public companies, putting aside the compliance factor, private companies can derive significant benefits from enhanced internal controls. Appropriate, properly functioning internal controls offer powerful benefits to private companies in a number of key areas.

If a private company's owners are considering the sale of all or part of the entity, or seek private equity financing, effective controls can increase a buyers' willingness to pay a premium. Controls enhancements can also lower borrowing costs and help attract new business partners. Today, investors, credit grantors and business people in general are keenly aware that a lack of strong internal controls increases investment and operational risk.

As a result, private companies are now actively seeking to enhance their internal controls, ensure the credibility of financial information and receive the operating benefits that a strong system of internal controls can provide.

Let's take a closer look at some of those benefits:

Financial Reporting Benefits

* Heightened credibility provided to all stakeholders: owners, employees, customers, lenders, or vendors;

* Better information to manage the business;

* Reduced risk of errors or irregularities.

Operational benefits

* Clarity on the roles and responsibilities of both management and employees;

* Greater controls over the management of business growth;

* Reduced costs obtained from greater operating efficiency;

* Maximized operating performance.

Regulatory benefits

* Decreased risk of litigation or business disruption;

* Lowered risk of employee or customer litigation;

* Increased credibility with the IRS, FDA, FTC and other regulators;

* More credibility in contractual relationships with vendors and customers.

In many, if not most, private companies, controls are informal. While management may believe controls are in place, they may not be functioning as intended, may not be fully implemented or may not have been implemented at all. Lack of segregation of duties can exacerbate control problems. In short, companies with inadequate internal controls remain unprotected against risks they thought were being mitigated.

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