Internal controls have traditionally been viewed as a requirement to avoid regulatory, legal and external audit/examination consequences. Rarely are they seen as a strategy for building business value and consumer confidence.
Yet, in virtually every industry, internal controls are becoming an important competitive differentiator. They are being elevated from a necessary evil to a valuable tool, due to increasingly engaged management teams, emerging risks and rapidly evolving technology – together with the growing expectations of customers, business partners and regulators. Internal controls are especially important in the investment management industry.
“There are a lot of moving parts in the registered fund world,” said Judd Wright, Grant Thornton Audit Services Partner and Mutual Fund Sector Leader. “The risk environment and control expectations for advisors, third party administrators and others are increasing and rapidly evolving. All of this is underscored by pervasive cybersecurity risks and the importance of protecting client data.”
The traditional role of internal controlsInternal controls have always served an important defensive function, and successful companies have embraced them enthusiastically. Their core objectives of protecting the effectiveness and efficacy of business operations, supporting the reliability of internal and external reporting, and complying with applicable laws and regulations can’t be underestimated.
Grant Thornton Advisory Partner Dennis Bell noted that “When I deal with leaders in regulated industries, such as investment management services, they’re very focused on controls. As a result, they all have very strong control environments.”
No organization, regardless of industry, welcomes the pain and costs associated with a financial statement restatement. Checking the compliance box is certainly critical – but it is the floor, not the ceiling, when it comes to the value controls can provide.
“A company that can demonstrate a strong control environment can gain increased consumer confidence, which is key to growing the business.”
Bell continued, “I think we can all agree that certain control failures can be very impactful on a company’s reputation. They can lead to a drop in customer confidence, profitability and shareholder value. But I think the opposite is true as well: a company that can demonstrate a strong control environment can gain increased consumer confidence, which is key to growing the business.”
Are there other ways that controls add value, beyond traditional risk management and compliance?
Yes – in fact, there are many ways controls can actually improve your business performance and give you a competitive advantage with current and potential customers.
Management engagement is the key to controls which proactively add value. If leadership views internal controls as core to company strategy and operations, the rest of the organization will follow.
In recent years, leadership expectations of internal controls have grown. Bell observed that “We find our clients are much less patient when it comes to internal control failures. They expect that controls are going to be strong, well-designed and operate effectively on a consistent basis.” An Internal Audit Director at a Grant Thornton client emphasized the importance of “focusing on how controls relate back to business objectives,” adding that “a concern for compliance and regulatory conformance is a business objective, in and of itself.”