Let’s say, as a CFO or Controller you have all policies outlined and procedures carefully designed. Everything is properly documented and bound into books and manuals, which are readily available for orientation, training, and daily reference. Through intensive internal audit program all components have been examined; everything have been tested in practice. Whatever did not work well has been tweaked; cumbersome procedures were replaced with more straightforward ones; the inferior ones have been improved.
Finally it has been determined that the internal control system is both effective and efficient in accomplishing the company’s goals and the executive management’s objectives. Is it reasonable at this point to expect that everything should be working like that expensive watch I keep mentioning as a model of a perfect mechanism? Unfortunately, not.
We don’t exist in the virtual world of The Matrix trilogy, where everyone is manipulated by the digital code. In real life it is the other way around: our well designed systems and structures depend on being properly handled by people. Their proficiency and diligence determine how well the policies and procedures are being performed. The truth is that every task performed by an employee is vulnerable to occasional unintentional errors, consistent sloppiness, and even deliberate mishandling.
Any designer of functional systems, with frameworks that include people as key elements, knows that humans are the weakest links in the chain of actions. Long time ago, when computers were so huge that a single unit occupied a hall the size of the New York Public Library’s Reading Room, all programs and data were coded on punch cards. A punched out spot was read by the computer’s card reader as a character or a digit. These cards were manually created by operators trained to use a keypunch machine. Guess what? Two separate people produced every card in duplicate. No exceptions. If the cards did not match, they have to be re-punched. Thus, the risk of human error was managed.
Such duplication of staff is unthinkable now. Today, we rely on computer systems to reduce at least the most common of the risks. The rest of flaws must be caught through vigorous and persistent scrutiny of performance quality. Monitoring is the cornerstone of internal control and one of the most important responsibilities of a supervisor. It brings the entire system together and assures that policies, procedures and people concur. A series of timely and thoughtful tests should become a part of your, or your internal auditors’, routine.
Remember: If not corrected, every mistake your employee makes will end up in financial data, documents and reports, for which you are ultimately responsible. One erroneous entry may affect your bank’s collateral statement or a presentation to the board of directors. Omissions will impair strategic decisions. Communication mishaps can impact commercial relationships. These flaws will most definitely be a poor reflection on your reputation as a financial leader. You have to create filters that will catch the debris before they pollute the results of your hard work.
You can read about various practical techniques of reducing accounting and finance systems' vulnerability to human factor in my upcoming book "CFO Techniques" (Apress, 12/02/2011), now available for pre-order at Amazon and Barnes & Noble.
The Frustrated CFO 