Agency theory is prevalent in most organizations of today, especially due to the organization having several branches within and without a geographical space. Hence a single individual (the owner) cannot handle all the functions within it.
Therefore, the owner hires people in various capacities to manage the business. As individuals, we tend to prioritize our interest over the interest of the business which leads to us finding ways to circumvent systems put in place to achieve an ideal place of work.
As a result of this, organizations implement and enforce controls to mitigate the risk of the company being defrauded.
Control is one of the salient measures organizations must put in place to facilitate the achievement of the organizational goal. Now let’s define primary control.
Primary controls are the mechanisms, rules, and procedures implemented by an organization to ensure the integrity of financial and accounting information, promote accountability, reduce wastage and prevent fraud. Primary controls are put in place to safeguard the assets of an organization.
Assets that are prone to fraud are referred to as risk assets. Risk assets are highly valued assets owned and controlled by an organization and are prone to fraud and theft. Examples of organization risk assets include Inventory, cash, fixed asset, trade debtors, etc depending on the type of business it operates. Find brief definitions below:
Inventory: These are goods available for sale in an organization.
Cash: This refers to money available to run a business on a day-to-day basis.
Fixed assets: These are resources owned and controlled by an organization from which an organization generates economic value.
Trade Debtors: This is a customer who owes an organization as a result of goods bought on credit.
Below are some controls implemented by various organizations:
Cashless Policy: Cash is the easiest to steal in an organization most especially from the sales team who interface directly with the customer. Cash received from customers for sales made can be easily diverted for personal use, hence some organizations have forbidden the collection of physical cash from customers by sales representatives and have encouraged customers to pay directly into the company’s bank account before goods are released.
First In First Out (FIFO): This is particular to companies involved in distribution, retail, and wholesale. Their business model requires them to hold a huge amount of inventory. Therefore, there is a high tendency some of these goods might get expired if not sold on time. Goods for which supply exceeds demand are highly susceptible to expiry while still in inventory. This measure helps to ensure that, products received first should be sold off, before issuing from a new batch of inventory.
Credit Limits: In a business, most customers prefer to buy goods now and pay later. Hence the risk of default is very high. Management has devised a new means of mitigating this risk by assessing the creditworthiness of their customers, this involves checking their pattern of purchase overtime, then set a maximum amount of goods that can be issued to them on credit.
Stock audit: This is an exercise that involves carrying out a physical count of inventory in the warehouse and comparing it with the level of stock in the records to identify gaps due to errors, negligence, or fraud.
Controls are highly necessary to ensure goal congruence is achieved, which ultimately translates to the achievement of organizational objectives.