Blog: Entity Level Controls – What Are They and Why do They Matter?

December 21st, 2016

As an individual (in a sole proprietorship), it is easy for you to shape your business based on your own internal rules, vision and ethics. As your business grows, it must move from informal decisions and processes accomplished by one person to formal structures necessary to guide the choices of many.

These are entity level controls – internal controls that help ensure management directives are carried out.

What Does an Entity Level Control Look Like?
If entity level controls guide a business, then many different systems and processes can be entity level controls with these controls ranging from risk management systems, to financial reporting processes, to monthly meetings. Anything that monitors, guides and controls operational and financial results is an entity level control.

There are a lot of different control options for your business’s internal control structure which means having strong entity level controls relies on selecting the right controls for the size and nature of your business.

Knowledge of the Business
The first step to selecting the right entity level controls is understanding how your business operates and identifying the controls already in place.

Knowledge of your business and its controls can be gained through:

  • Interviews of key management and other employees.
  • Analyzing significant legal agreements (such as employee contracts, supply agreements, financing credit facilities) and similar documents for reporting and operational requirements.
  • Observing the flow of communication throughout your business (team meetings, newsletters, emails and other communication channels).
  • Observing how key operational decisions are made such as production volumes, sales targets, risk management and others.
  • If you already have a strong understanding of how your business operates, most of the work for this step has been completed, but part of the information gathering process includes developing internal controls assessment tools.

Tools For Analysis
Corporate Structure Chart (only required for groups of companies) – A chart that documents the relationships and the movements of transactions among a group of companies.

Employee Organization Chart – A flow chart that documents your organization’s employee reporting structure (i.e. a pyramid, mostly flat, a web) and includes your employees’ titles and their major responsibilities.

List of company applicable laws and regulations – A table that documents the major laws and regulations that your company must comply with. Is your company required to charge provincial sales tax? Does your business use dangerous materials in its operations and follows the Workplace Hazardous Materials Information System (WHMIS) communications standards?

Assess Your Internal Controls
Once you’ve gained an understanding of your business and its entity level controls, the next step is to identify risks to your business and areas with weak or no controls. Any area that has both risks and weak controls is a major concern. Entity level controls should be designed to mitigate your risks and complement existing good controls.

If you’re interested in learning more about assessing internal controls please read our article: How to Perform an Assessment of Your Internal Controls (http://mackay-crowehorwath-ca.crowenetwork.staging.wpengine.com/blog/assess-internal-controls/)

Internal Controls are a Key to Your Company’s Success
Think of strong internal controls as a key part of the foundation for your growing, successful business. Without them your business will be unlikely to survive in the long run.
Crowe MacKay Can Help!
If your business is growing and you aren’t sure if your entity level controls are suitable, or you have any other questions on internal controls Crowe MacKay can help. Please contact us by phone at 1(844) 52 CROWE or by email at contactus@crowemackay.ca

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