Build Controls Using this Guide "COSO Framework"

Establishing Internal Control for Your SME Using the COSO Framework: A Practical Guide for Entrepreneurs

When running a small or medium-sized enterprise (SME), it’s tempting to think internal controls are something only big corporations need. However, having a solid internal control system can save your business from costly errors, fraud, and inefficiencies. And here’s the best part: setting up these controls doesn’t have to be complicated or overwhelming, especially when using the globally recognized COSO framework. As the CEO of the company you don't really need to go deep into the methodology, however at least you need to understand it so you request it to be implemented in your own business for your own benefit.

Let’s break down how you can adapt the COSO framework to your SME in a simple, practical, and actionable way.

What Is the COSO Framework?

In plain terms, the COSO framework is a set of guidelines that help businesses create effective internal controls. These controls ensure your company operates efficiently, complies with laws and regulations, and protects assets from risks. COSO stands for the Committee of Sponsoring Organizations of the Treadway Commission— that entails below five main components:

1. Control Environment
2. Risk Assessment
3. Control Activities
4. Information and Communication
5. Monitoring Activities

Now let’s see how you can implement these components in your SME.

1. Control Environment: Setting the Tone

Think of the control environment as the foundation of your business. It’s about the culture and values you instill in your team. If you prioritize integrity, accountability, and fairness, your team will follow.

Practical Steps:

• Lead by Example: As the leader, show your team that honesty and compliance matter. For instance, avoid cutting corners on liabilities or ignoring minor ethical lapses, as said lead by example.
• Define Roles Clearly: Create job descriptions that specify responsibilities and limits. For example, if you’re a restaurant owner in Dubai, ensure your cashier’s duties are clearly defined to avoid confusion. Many overlook that as if it's unnecessary and only by the book process, however you will provide clarity for the general job duties and responsibilities.
• Implement Policies: Draft simple policies for critical areas like expense approvals or conflict of interest. Keep them easy to understand. Policies can be one page long, or more depending on importance and complexity, so don't be afraid of the word policies and procedures.

2. Risk Assessment: Identifying What Could Go Wrong

Every business has risks, whether you’re running an e-commerce platform in #Riyadh or a manufacturing firm in #Sharjah. Risk assessment involves identifying potential threats and finding ways to minimize them.

Practical Steps:

• Brainstorm Risks: Involve your team in listing risks. For example, a furniture store might face risks like theft, damaged inventory, or fluctuating wood prices.
• Prioritize: Focus on the most significant risks. Ask yourself: What’s most likely to happen? What’s the cost if it does?
• Create a Plan: For each risk, list actions you can take. If fraud is a concern, implement checks like reconciling bank accounts weekly.

3. Control Activities: Taking Action to Address Risks

Control activities are the specific steps you take to reduce risks (like reconciling bank accounts). Think of them as the day-to-day practices that ensure everything runs smoothly.

Practical Steps:

• Segregate Duties: Avoid giving one person too much control. For example, in a retail shop in #Jeddah, have one employee handle cash and another record sales, shuffle between duties so a process is cut into steps done by different individuals.
• Automate Where Possible: Use affordable tools to streamline tasks. Accounting software like #Zoho or #QuickBooks can help automate invoicing and reduce human error.
• Set Limits: Establish approval thresholds for spending. For instance, purchases above a certain amount should require your sign-off. Meanwhile don't try to hold all the strings by one hand, delegate wisely.

4. Information and Communication: Keeping Everyone in the Loop

Good internal control relies on clear communication. Your team needs to understand what’s expected and feel comfortable raising concerns.

Practical Steps:

• Share the Vision: Regularly remind your team why internal controls matter. Use examples they relate to, like explaining how proper inventory tracking prevents stock-outs.
• Create Feedback Channels: Set up ways for employees to report issues—anonymously, if needed. For example, a suggestion box directed to your office can work.
• Document Everything: Keep clear records of policies, approvals, and transactions. This helps avoid misunderstandings.

5. Monitoring Activities: Ensuring It All Works

Internal controls aren’t a set-it-and-forget-it deal. Regular monitoring ensures your controls stay effective as your business grows.

Practical Steps:

• Perform Spot Checks: For example, if you run a logistics company in Cairo, periodically verify fuel logs to prevent misuse, another example periodical cash register checking.
• Track Metrics: Use simple KPIs (Key Performance Indicators). For a small online store, track refund rates or delivery times.
• Get External Help: Bring in a consultant periodically to review your controls. #Axcell, as well as other consulting firms, offer tailored advice to help SMEs in the Middle East enhance their internal controls.

Establishing internal controls may seem daunting, but it’s easier than you think, and the benefits are enormous. Start small: define roles, brainstorm risks, and document processes. Remember, the COSO framework isn’t a rigid rulebook but a guide you can adapt to your business.

If you’re ready to take control of your SME and want expert guidance, we can help you implement practical, cost-effective solutions tailored to the Middle East. Reach out today:

• WhatsApp: https://wa.me/971509044979
• Email: [email protected]

Let’s make your business stronger, more efficient, and prepared for growth—starting today!