An investigation of internal financial reporting in a large financial services company

Abstract

Against the backdrop of the corporate scandals that have occurred over the last few decades, the demand on companies to bolster their internal financial controls has undoubtedly come under scrutiny. Codes of best practice and regulations have placed a significant burden on the audit committee to provide a statement regarding the effectiveness of the internal financial control environment as a result. This research sought to examine how a large financial services organisation in the South African banking sector designed, implemented and monitored their internal financial controls. The research applied a quantitative approach and gathered information from 100 finance staff using a self-developed, electronic questionnaire in order to achieve the objectives of the study. The data was analysed statically whereafter answers were grouped to investigate: the frameworks and reporting mechanisms to guide the reporting of internal financial controls; the frequency of the internal financial control mechanisms in place and their related content; the degree of representation from risk partners; other functions who are performing financial controls; and the maturity and expectations of the Finance representatives as these relate to the reporting of internal financial controls. The study revealed that there is a robust control environment; however, not all the financial controls have been documented formally. Compliance and Procurement were not perceived as adding value to the internal financial control committee meetings. 'Breaches in segregation of duties' and 'new risks from changes in operating models' should be added as reportable items. Internal and External Audit issues were considered essential items to be reported. Functions outside Finance are not adequately skilled to identify and mitigate financial risks and that not enough emphasis is placed on the automation of internal financial controls. Furthermore, the statement issued to the public to relay comfort that internal financial controls are managed effectively may not be sufficient. The study proposed recommendations in the areas of formal documentation of financial controls, internal financial control forum reporting, upskilling of areas performing financial controls, internal financial control automation and external reporting on internal financial controls. The recommendations were provided to address the identified disparities and improve the internal financial controls of the large financial services organisation.