Business Controls - Principles & Methods

CON1

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Types of business controls...

“You need to identify the right type of control(s) to counteract the occurrence or impact of an identified threat. You have a choice between the following types of controls:

• A preventive control prevents the occurrence of a threat - i.e. before it arises.

• A detective control detects and reports the occurrence of a threat. In other words, a detective control detects a threat after it has arisen. A detective control serves as a safety net for a preventive control that fails to prevent, by detecting and reporting the failure and impact of the threat so that corrective actions can be taken. Thus, a detective control works in close concert with a corrective control.

• Should a preventive control fail to prevent a threat’s occurrence, a corrective control would, after the threat had been identified and reported by a detective control, try to: a) Rectify the threat’s impact (i.e. the loss or damage it caused) and minimize, as far as possible, the consequential negative financial impact. b) Identify and neutralize the cause of the threat (i.e. weak points in business strategies and systems) so that preventive controls can prevent future occurrences.” - Michiel Jonker (For more information, please read this: Business Plan)

Message: This cartoon illustrates the three types of controls, namely preventive, detective and corrective controls.

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CON2

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The foundation of business controls...

“Employees, who are responsible for the enforcement of controls, are important to a business’ internal control system. The success of an internal control system depends on the competence and integrity of these employees.

“Therefore, whether a control is effective or ineffective depends in the first place on how competent an employee is to enforce it.

“Secondly, it depends on how reliable an employee is in enforcing it constantly without any deviation.

“Should an employee be competent to enforce a control (i.e. he knows why, how, when and where he should enforce the control), but at the same time he is a dishonest person with, say for example, fraudulent objectives, his competence does not help your business at all (and it would definitely not save your business money and protect its profits). He would commit fraud by using his position of power to suppress the functioning of a control. Profit erosion would still occur in your business.

“On the other hand, should an employee be an honest person, though incompetent to enforce a control, his honesty would also not save your business money and protect profits. He would not be able to enforce the control. Profit erosion would still occur in your business.” - Michiel Jonker (For more information, please read this: Business Plan)

Message 1: Requirement for effective business control - employee integrity problem cartoon: This cartoon illustrates a dishonest employee (though competent) in charge of a business control.

Message 2: Requirement for effective business control - employee competency problem cartoon: This cartoon illustrates an honest employee (though incompetent) in charge of a business control.

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CON3

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Avoid over control...

“Every control you use is going to cost you money!

“The rule is that the cost of a control should NOT be more than the financial impact of the threat that is being counteracted. It is extremely important that every control is a cost-effective counter solution and that you can justify it economically.

“Remember, your main objective in counteracting a risk is to turn it into an opportunity where you can protect and rescue your profits / potential profits to some extent. By implementing controls that are not economically feasible, the control will become the risk – it will cost you more than the current or potential profit erosion!

“So, it would not be feasible to implement any and every possible control you want to in order to counteract a specific risk. And to tell the truth, it is not even feasible for big companies!

“Sometimes it would not even be worthwhile for you to implement a single control to counteract a specific risk (in which case it would be better to avoid the activity posing the risk or to accept the risk fully…).” - Michiel Jonker (For more information, please read this: Business Plan)

Message: This cartoon illustrates over control (too expensive controls) in a company.

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