Types of Internal Controls

Phil Kenkel

Bill Fitzwater Cooperative Chair

Oklahoma State University

We all use internal control in our everyday life.  We lock our houses and cars.  We don’t keep our PIN numbers with our debit cards.  We review our credit card statement for unauthorized charges.  We keep receipts to support our tax returns. We routinely put the trash out the day before trash day.  Each of those actions is an example of an internal control that has a direct parallel in an agricultural cooperative.  There are four main types of internal controls –

A house policy on when to take out the trash is an example of a directive control.  Directive controls provide guidance to employees that help the cooperative prevent risk or loss. A procedure for bin entry would be a directive control for both worker safety and regulatory compliance. Policies, procedures and training sessions all fit under the category of directive controls.  Directive controls are the simplest component of an internal control system, although perhaps the easiest to bypass.

Locking your house and car is an example of a preventative control.  Preventative controls are designed to prevent loss or risk.  In addition to physical security measures, limits on authorized spending, and separation of duties and various sign off and approval systems are all examples of preventative controls. When considering preventative controls, the balance between the inefficiency and inconvenience of the procedure must be balanced against the possible risk.  Excess controls increase the incentives to bypass or override the control procedure.

Reviewing your bank statement or credit card bill is an example of a detective control.  Detective controls are designed to discover the source of an error or irregularities and correct it.  Detective controls can help to prevent little problems from becoming big problems.  For example, regular measuring of grain inventories may uncover the fact that the cooperative is not considering grain shrinkage during turning or cleaning.  Correcting shrinkage estimates could avoid a large inventory discrepancy when the bins are eventually emptied.

If your policy of always putting the trash out the night before trash day stemmed from missing getting the trash out on time, it is also an example of a corrective control. Corrective controls strive to remedy problems that can be systematically corrected. Additional training or changes in procedures are simple examples of corrective controls.  Very often corrective controls are put in place because of regulatory requirements.  Corrective controls become directive and preventive controls.  The distinction is that they are developed from observing systematic problems, not through an assessment of risks.

We all use internal controls in everyday life.  Of course, if you have teenagers, you know about breakdowns in internal controls!