Third in a four-part series on multifaceted perspectives of internal audit

There’s an old story about three blind men who approached an elephant from different directions. One man, holding the trunk, insisted the object was a tree. Each in turn identified the animal as a different object depending on his perspective, but no one recognized it as an elephant.

In many ways, internal controls can sometimes be that elephant in the room. Not only is it unwise to ignore these controls, but individuals throughout a financial institution will have different perspectives about the relevance of such controls. Everyone must, however, come to recognize that internal controls are both valuable to each person’s respective duties and essential to the overall organization’s commitment to risk management.

“From where I sit . . . ”

All members of the organization, whether they are board members or tellers, manage some aspect of internal control in direct relation to their responsibilities. Controls should play an integral role in each and every duty, and implementation must be diligent.

Still, abiding by the rules day in and day out can become mundane. In the haste to serve customers or perform tasks, following an internal control procedure can occasionally be viewed as a needless hassle. Often complacency sets in. Sometimes the right controls are absent altogether.

Internal controls aren’t intended to make jobs more difficult; on the contrary, they ultimately make jobs easier. Without proper controls that are respected accordingly, the worst could happen at any point in the chain and create dire consequence at every point in the chain.

Here’s a snapshot of controls and their importance from a few selected perspectives.

The board director

The board is the alpha and the omega of controls—the beginning and end. Board directors are ultimately responsible for establishing policies in the first place to protect both shareholders and assets, and they must be thoroughly attentive in performing their governance role to ensure that in the end, controls are indeed being applied.

The board is balanced by executive management and internal and external auditors. While directors do not necessarily have intimate knowledge of day-to-day operations, they do own the responsibility of coordinating overall audit efforts. If faced with penalties or losses, directors could be forced to write out checks from their personal checking accounts.

The president

Controls affect the executive role in many ways. One way is the rating management receives from examiners during regulatory and compliance exams. This rating is a direct reflection on how well management has implemented and enforced internal controls.

If internal controls are lacking, a lower rating is given, potentially triggering more frequent examiner visits and tougher ones at that. Such visits can translate into disappointment with personnel performance, creating poor staff morale and elevating stress levels for everyone. Inevitably, this shifts a president’s focus from managing high level success strategies for the financial institution to dealing with fallout from inefficient or ignored controls.

The lender

A senior lender will share some of the president’s responsibilities when it comes to managing examinations; however, the lender is ultimately the one who must resolve issues that affect the lending function.

Poor controls can put the lender on the wrong side of blame if there are losses due to fictitious loans or other fraud. Controls such as segregation of duties within the loan process serve as deterrents to fraud, protecting lending personnel from temptation while safeguarding assets.

The teller

Handling cash is high-profile work as well as tempting, which makes internal controls the framework of a teller’s position. Tellers are particularly vulnerable to the consequences of not following procedures. Working closely together, they may forego procedures for the sake of speed or in the spirit of customer service, as they see it. In addition, a vault teller who fails to follow basic controls like balancing the vault at required intervals or keeping combinations secure can create an open invitation to theft.

These are but a few examples. It’s important to remember that internal controls affect each and every position in some manner, shape, or form. Ignoring their importance, from any point of view, can be costly.