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Internal Controls Automation 101: What It Is and How It Works

June 13, 2023


Paul Dixon



The following is an astonishing statistic: Companies lose 5% of revenues to accountancy errors and fraud. And the uncomfortable reality is that organizations must look internally to find ways to reduce that figure. After all, employees are human - they make mistakes and don't always choose the correct decisions.

This is where internal controls automation is proving to be a game-changer. This article delves into what it is, how it works, and the benefits.


Internal Controls Overview

Before diving into internal controls automation, we must remind ourselves why internal controls exist. And to do this, we need to rewind the clock.

Most of you reading will remember these infamous names from the world of accountancy scandals: Enron and Worldcom. In this guide, we can't go into detail.

But all you need to know is that the tremendous fallout from both cases put into motion a force that eventually led to the creation of the Sarbanes-OxleyAct of 2002. And globally, similar laws and regulations are also in play, such as the European Union's 8th Company Law Directive on Disclosure and Transparency.

Looking to the future, the UK's Economic Crime and Corporate Transparency Bill will make it a corporate criminal offense if companies fail to prevent fraud.

Today, internal controls processes are at the heart of corporate governance - and they are necessary procedures to achieve two primary objectives:

  • Mitigate auditing errors and fraudulent activity
  • To comply with increasing laws and regulations

The Problem with Manual Internal Controls

In the section after this one, we will dig deeper into the various internal controls components and, most importantly, reveal how the shift from manual internal control processes to automated ones is the future.

But first: Why are internal controls completed manually, not up to the task?

Apart from taking up valuable hours (costing the company money) in an internal controls professional's working day, there is also the following issue - the lengthy amount of time it takes to detect fraud. And also the difficulty recovering the money.

It takes an average of 18 months for an organization to discover fraud - that's according to the Association of Certified Fraud Examiners (ACFE). And it gets worse. In 58% of cases, attempts to recover money fail. Also, manual processes should be detecting fraudulent activity more. In only 40% of cases, manual auditing detects it.

Worryingly, most fraud is detected by chance.

But, fortunately, it's not all doom and gloom. Why? Because internal controls automation is already making deep inroads into solving these problems.

The Future of Internal Controls Is Automation

The future of internal controls is not only in the future. It’s already in the here and now and is gaining significant traction. But what exactly is it? Internal controls automation is the use of technology (increasingly AI) to automate processes that ensure compliance, mitigate risks, and prevent fraud.

Let's examine this in more detail. And to do this, we must break the process into its components. After all, internal controls are effectively a group of procedures all working together. Here are some of the most important ones.

Internal Controls Automation: Master and Business Process Data

Master data and business process data are two related but separate areas. In the most basic terms, master data refers to the core data entities that are critical for an organization's operations and transactions. Here are some examples:

  • Vendor Master Data
  • Debtor Master Data
  • Material Master Data
  • Payroll Master Data

Business process data refers to the data generated during the execution of specific operational activities within an organization's workflow. Examples include:

  • Purchase Order Data
  • Financial Reporting Data
  • Customer Relationship Management (CRM) Data
  • Production Planning Data

Although different types of data exist, it's important to remember the following: Data is data. And for internal controls teams, the focus is on ensuring data accuracy, integrity, and reliability.

Data administration, such as master data management (MDM), is, of course, a fundamental facet of internal controls. Because data inconsistencies, inaccuracies, and inefficiencies are all ingredients that create accounting errors, financial irregularities, and fraud (due to inadequate control over critical data assets).

And today, intelligent companies are combining two things to reduce accountancy errors and significantly reduce fraud:

Effective data management with internal controls automation.

To illustrate this, we can examine how automated internal controls software solutions, such as remQ, work. In the case of remQ, which operates within SAP ERP and S/4HANA as an add-on, internal controls team scan move from ineffective and time-consuming manual processes to far more advanced procedures.

With internal controls automation, companies can now use their data to:

  • Perform automated fraud/error checks with libraries of controls
  • Operate business transaction monitoring in real-time
  • Set up automated actions in real-time
  • Resolve issues in real-time before losses occur

The over-arching point is that negligent or nefarious activity is identified and dealt with far sooner. The result? Automated internal controls processes can lead to a 60% reduction in losses.

And considering the statistic at the beginning of the article (companies, on average, lose 5% of revenues to accountancy errors and fraud), it's a no-brainer why automated internal controls is a fast-growing solution that, alongside effective data management, all large organizations should embrace.

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Organizations are increasingly exposed to compliance requirements. Adopting innovative ways to assess and manage risk and enhance performance is critical. That’s where data analytics and continuous monitoring are helping to simplify and improve the internal control system, increase operational efficiencies, reduce costs, and detect fraud and errors earlier. Internal controls become a way for organizations to create value.

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Internal Controls Automation: Regulatory Compliance

Let’s now look at another fundamental facet of internal controls: Complying with laws and regulations.

We have already discussed how regulatory compliance laws have steadily increased since 2002. Internal controls teams have a big task, ensuring the companies and organizations they work for comply with the Sarbanes-Oxley Act (SOX) and similar laws in jurisdictions worldwide.

And the risk of receiving a hefty financial penalty and significant reputational damage is real.

For example, in the US, a $5 million fine and prison sentence of up to 20 years can be dished out to company executives who knowingly violate SOX compliance laws.

But there is good news: Internal controls automation can also help companies significantly decrease the risk of violating audit regulations. How so? Let's use remQ as an example once again.

Continuous monitoring, as provided through remQ software (within SAP ERP and S/4HANA), of master and business process data, will identify and flag potential compliance violations as soon as it happens. In a nutshell, it means internal controls teams can easily do these things:

  • Identify potential compliance issues in real-time
  • Take action on compliance issues quickly
  • Reduce the risk of violating auditing regulations (SOX and/or similar)
  • Save money as compliance is now automated

And the automated compliance benefits don't stop here.Because the rise in auditing regulation is only part of the equation. Dependingon the jurisdiction the company operates, legal compliance obligations alsoexist in the following areas:

  • Payroll Compliance
  • KYC (Know Your Customer) Compliance
  • AML(Anti-Money Laundering) Compliance
  • Global Sanctions Lists Compliance
  • Criminal Watchlists Compliance

Internal controls automation can also help companies and organizations comply with all of the above. For example, with remQ operating seamlessly in the background within SAP, there is the option for new and existing data (for example, a new customer) to be automatically checked against sanctions, criminal watchlists, and politically exposed persons (PEP) lists.

Final Thoughts and How remQ Can Help

Companies worldwide collectively lose trillions of dollars yearly due to negligent auditing and nefarious fraudulent activity. Professionals, such as internal controls managers, have a lot on their plate. Because they also must ensure the organization they work for is compliant in a rapidly evolving regulatory landscape.

But something is certain: Digital transformation, which is the wider umbrella that internal controls automation fits under, is here to stay. In fact, it will accelerate faster now we are in the era of AI.

And just like the tractor replaced the horse and plow - automation is the future of internal controls.

To learn more about how remQ can assist your business with its goals to cut audit errors, reduce fraud, and stay compliant within your SAP environment, you can learn more here.


Paul Dixon

Paul is a RegTech content writer & strategist with extensive experience in digital marketing and journalism. His work has appeared in the Guardian newspaper. He also holds a degree in International Relations, where he studied global sanctions compliance and cross-border finance.


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