9 Limitations of Internal Controls And How to Mitigate Them

Internal controls are the building blocks of a company’s security posture. They shape the company’s security architecture and they can often be the difference between a secure company and a vulnerable one. 

A recent study suggested that about 68% of occupational fraud occurred due to reasons relating to internal control loopholes—the reasons ranging from a lack of internal controls, incidents of overriding existing controls, or insufficient review by top management. 

The statistic above clearly points out that as strong as internal controls are, they aren’t unbreakable. There are always loopholes that can be exploited if they aren’t constantly reviewed and updated. In this post, we delve deeper into the limitations of internal controls and how to mitigate them. 

What are internal controls?

Internal controls are processes or measures that a company has in place to create, secure, and accomplish an operational, financial, legal, or regulatory objective. They are directive principles designed and implemented by a company’s board of directors that define procedures, and operational protocol with the aim of enabling efficiency, accuracy, and structure.

Why are internal controls important for organizations?

Internal controls play a crucial role in ensuring the organization is equipped to handle security threats, minimize risk, define key processes for employees to follow, and ensure streamlined operations among many others. Here are the reasons why internal controls are critical to an organization: 

Improves processes

Internal controls are standard operating procedures that work on two fronts. The first purpose is to define vital roles and processes for employees to follow from an operational perspective and the second is to outline best practices from the POV of security. A strong internal control environment is integral to an organization looking to improve security and efficiency. 

Aligns compliance and security

Every organization creates a set of unique set of compliance objectives—these may range from obtaining new compliance certifications to including more systems and processes within the scope of compliance. Internal controls form the bedrock on which compliance programs are built. Every compliance regulation comes with specific requirements that internal controls need to be aligned with. Doing so not only ensures faster compliance but also strengthens the company’s security posture. 

Defines roles and responsibilities

The organization is only as strong as its weakest link—it’s people. Internal controls aren’t just processes. They involve people across the organization. There are two ways in which internal controls can benefit an organization on this front. On one hand, internal controls help employees understand best practices and put them into action. On the other, internal controls help companies define responsibilities and the segregation of duties within the organization’s immediate and long-term security strategy. 

Reduces security incidents

Strong internal controls can significantly reduce the risk and occurrence of security mishaps. These can range from unauthorized access and data theft to fraud. Creating controls that build into the long-term strategy enables companies to adapt to the evolving threat and risk landscape by making smarter decisions.   

Safeguards internal assets

Some types of data such as cardholder information, healthcare records, and Personal Identifiable Information (PII) can be more sensitive than others. Organizations are mandated to ensure the safety of such data and limit what is collected, accessed, and processed at any given point in time. Internal controls ensure privacy laws and data security measures are adhered to throughout the data lifecycle. 

Instills stakeholder trust 

Stakeholders are a crucial part of every organization’s journey. Having a strong internal control system can go a long way in giving customers and stakeholders reasonable assurance of the organization’s commitment to compliance and data security. Conversely, not having strong operational controls can make the adherence to regulatory requirements a cumbersome task opening the door to disciplinary actions, financial risk, and reputational damage.  

Also check: Best Internal Control Softwares

The 9 most pressing limitations of internal controls

As important as they are, internal controls aren’t without weaknesses. They certainly have inherent limitations. But understanding these limitations is key to helping organizations prepare better and set themselves up for success. With that in mind, here are the top 9 internal control limitations and ways you can mitigate them: 

1. Human error

When it comes to risk, humans are considered the weakest links in cybersecurity. A single instance of misjudgement or negligence can derail the entire control system and render it ineffective against certain internal and external types of risk.

Mitigating human error: Understanding human judgement and eliminating human error is impossible. However, an effective way of mitigating human error is by ensuring periodical security and policy training sessions for employees. This way, security is kept top-of-mind and best practices are woven into organizational culture. 

2. Control blindspots

Even the most fool-proof internal control systems can fail if they are not updated regularly. With the threat landscape constantly evolving, compliance and control blind spots are a genuine threat to data security. For this reason, it’s vital to deploy the right set of internal control processes to maximize coverage. 

Mitigating control blindspots: Continuous control monitoring is a vital tool that helps organizations keep track of internal controls in real-time and ensure they are aligned with the latest best practices and compliance requirements. Continuous controls monitoring also helps security teams identify anomalous events and prevent the occurance of fraudulent actions.    

The Sprinto advantage: Sprinto is a great solution for organizations looking to implement continuous control monitoring across their tech stack. The platform helps security teams gain a bird’s eye view of their controls and rectify vulnerabilities as they occur. Security teams are also notified when controls are about to fail allowing them to deploy remediations and restore controls in record time.

3. Management override

A majority of the internal policies are formulated and implemented by upper management. And often, management can override certain controls, even in instances where they are working correctly. Management override can be dangerous because it can be guided by personal gain. Moreover, it can cause faulty record keeping opening the door to other fraudulent activities.    

Mitigating override of controls: Conducting a thorough audit trail is an effective way of keeping track of changes and ensuring every override of controls is tracked. Changes need to be made keeping in mind the ethical values of the entire organization and the potential risk that comes with making rapid changes to prescribed policies.  

4. Internal threats and employee collusions

Ideally, employees are expected to work within the confines of a company’s internal control procedures. In some cases, employees can also be the ones who override controls. This may not always due to nefarious intent—it can also occur as a result of employees misinterpreting business requirements or the segregation of duties. But there have been instances where employees are the ones that identify internal control deficiencies and override administrative controls.

Mitigating internal threats: Eliminating internal threats happens in two ways. Like with human error, internal threats can be controlled with a well-thought-out employee training program. Process owners will also have to work on safeguarding assets and critical systems, implementing a comprehensive approval process, and avoiding misuse of resources. 

Good Read: Internal Control Activities Guide

5. Compromised judgement

Internal controls essentially determine the organization’s operating style. It takes a fair bit of experience and careful judgement to understand business requirements and management directive and translate this into architectural control. While it’s okay to gain inspiration, it’s important to understand that there is no one-size-fits-all. Every organization’s control objectives are different and require careful consideration. 

Mitigating bias: Truly comprehending an organization’s control objectives and business requirements requires a great degree of cognizance and expertise. Senior management is often tasked with overseeing independent risk assessments and performance reviews to test the effectiveness of controls and work around their inherent limitations. Only then can security teams be directed on the control activities that need to be prioritized. 

6. Siloed approach

Formulating the right set of internal control processes is tedious—business processes need to be included within scope, maintenance requires careful human judgement, and administrative security controls need to be tested for effectiveness. There are several moving parts and addressing them separately can prove to be problematic. Siloed work can result in duplicate work, wasted resources, and inconsistent testing.

Mitigating siloed work: Workflows are at the base of the solution here. It is vital that upper management take a unified approach to creating, testing, and implementing the right set of controls. Conducting periodic reviews coupled with reporting can ensure controls are effectively aligned with functions.    

The Sprinto advantage: Sprinto specifically helps companies achieve compliance by taking a systematic, unified approach to compliance. The plug-and-play solution seamlessly integrates with the tech stack, maximizing coverage. It also helps automate preventive control activities and compliance checks to ensure controls are working efficiently.

7. Overuse of internal controls

Everyone is prone to overthinking certain decisions. This can be true for upper management as well. Overcooking security controls is a consequence of not taking a deep enough dive into the company’s operations and risk framework. And as a result, upper management may attempt to implement a host of controls that the organization does not need leading to severe inefficiencies. 

Mitigating overuse of internal controls: Finding the right mix of controls requires upper management to understand the organization’s nuanced needs. Controls can be divided into internal critical and non-critical ones and implemented accordingly. Overlaps need to be checked and low-risk or non-essential controls need to be decommissioned. Change management also plays a crucial role in finding the sweet spot. Any change made to the control environment needs to be gradual, measured, and with purpose.   

8. Technical weaknesses

Controls are implemented on two fronts—physically on hardware components as well as virtually on the cloud or through software systems. And so, any misconfiguration in one system can cascade on to related controls. Instances of non-maintenance can cause vulnerabilites that can take a long period of time to fix.    

Mitigating technical weaknesses: Eliminating technical weaknesses can only be mended with broad-stroke best practices. For one, it’s important to ensure any component within the tech stack needs to be vetted for compatibility. This means repeated testing to ensure misconfigurations are identified and fixed in a timely manner. And finally, maintenance activities need to be scheduled regularly whenever possible. There also needs to be a clear mode of communication to ensure any breakdown of controls is effectively conveyed to every other function within the organization.  

9. Murphy’s law

Philosophical as it sounds, sometimes things happen that are beyond anyone’s control. Murphy’s law states that nature often favours a hidden flaw. This means a single instance of misjudgement can cause a chain reaction that isn’t immediately apparent. And these are the most damaging events. A control environment is not immune to unforeseen circumstances. A single misstep can essentially break down the whole control environment and even a thorough root-cause analysis can come up futile. 

Mitigating Murphy’s law: External events are difficult to predict. The only way to prevent this from happening is by sticking to departmental routines—prepare for cyber risk by testing controls regularly, following the correct procedures, and conducting thorough internal audits, and monitoring the internal control framework at all times. 

Think bigger with Sprinto

It’s no secret that automation legitimately solves a number of internal control limitations. With a comprehensive automation solution, companies are not only able to strengthen operational controls but are able to automate a number of compliance activities and focus their efforts on the things that matter. 

And that’s where Sprinto comes in. 

Sprinto is a compliance automation platform that helps you do more than just cover up weaknesses. It helps you align controls with framework requirements, automate evidence collection, and achieve audit-readiness in record time. And over the long run, it also helps optimize controls, keep up with evolving regulatory requirements, and adopt a sustained approach to cybersecurity. 

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Frequently Asked Questions 

What are the components of the internal control system?

The internal control system is intertwined with management processes. The internal control framework consists of five key components that work together to provide reasonable assurances that control objectives are met, namely risk assessment, control environment, control activities,  communication, and monitoring and performance analysis.

What are the key advantages of a strong internal control system?

Formulating a strong internal control system comes with a number of advantages such as:

• Stronger asset protection
• Clear definition of roles and responsibilities
• Higher stakeholder satisfaction 
• Greater alignment with regulatory and compliance standards
• Improved operational efficiency
• Increased transparency and accountability

What is the difference between hard and soft controls?

Hard controls are physically observable and tangible controls such as policies, procedures, and organizational hierarchy. Soft controls, on the other hand, are controls that are of an intangible nature pertaining to aspects such as ethics, clarity, personnel, culture, and competence.