Why Internal Controls Are Critical for Growing UAE Businesses

The presence of internal controls is the backbone of a compliant and organized business anywhere in the world. Therefore, a lack of controls truly reflects weaknesses not just in the systems and procedures, but also in how risky a business is in terms of compliance. Furthermore, they also protect an entity from occurrences of fraud and errors. Hence, it is a prerequisite for any business to survive in any jurisdiction, including the UAE. In this blog, we highlight the importance of internal controls for the UAE’s growing businesses.

What Are Internal Controls & Why They Matter

In simpler terms, internal controls include systems, policies, and procedures designed to protect a firm’s assets, ensure accurate financial data, and ensure compliance with laws.

Formally, Turnbull presented the official explanation of the subject in 1999, as quoted by the Association of Chartered Certified Accountants (ACCA UK). According to Turnbull guidance, internal controls are the policies, processes, tasks, behaviors, and other aspects of an entity that collectively:

• Facilitate effective operations in a way that responds efficiently to potential risks that limit or impact its objectives. The risks can be business, financial, compliance, or operational risks. Furthermore, it also includes the protection of assets and ensuring that liabilities are properly managed.
• Ensure the quality of internal and external reporting. This means timely, relevant, and reliable financial information for internal and external stakeholders.
• Ensure compliance with relevant laws and regulations and with the entity’s policies.

In the UAE, businesses must understand the importance of internal controls to ensure compliance with applicable rules and laws, such as

• Commercial law
• Corporate tax law
• VAT Law
• Anti-money laundering regulations
• Economic substance regulations

In addition to compliance matters, effective internal controls promote operational efficiency, resulting in a lower probability of fraud and errors. Furthermore, they also reduce financial risks and ensure good corporate governance.

Risks Faced by Fast-Growing Businesses

Every business is prone to risks, whether it is small, large, mature, or a fast-growing business. Specifically, for fast-growing businesses, everything is happening swiftly; therefore, they are prone to lapses. However, enforcing effective internal controls irrespective of the stage or size of the business mitigates risks. Let’s enlist some key risks faced by fast-growing businesses.

• Lack of proper policies and procedures concerning the internal controls
• Lack of proper segregation of duties
• Unclear job descriptions resulting in further weakening of segregation of duties and control weaknesses
• Poor or incomplete documentations
• Missing key deadlines
• Multiple duties are assigned to a single individual
• Cash leakages

Key Internal Controls Every UAE Business Needs

There are some key controls that every business in the UAE must implement to ensure compliance and mitigate risks. However, firms must analyze their circumstances, jurisdiction, and relevant compliance framework to ensure complete and efficient internal controls. Some key internal controls may include the following:

Segregation of Duties

The entity must ensure that no single employee controls all the aspects of a financial transaction. Therefore, the roles of initiator, recorder, and approver must be done by separate people.

Financial Controls and Reconciliations

Businesses must ensure regular reconciliation of financial records, including bank statements, supplier statements, and debtor balances.

Access Controls

Enforce effective access controls for sensitive information and software. For example, giving access of company’s accounts to relevant persons only with password protection.

Documentation and Record-keeping

Maintain detailed records complying with relevant laws and regulations.

Management Review

Companies must ensure active monitoring and management review of operations and financial data, and processes regularly.

Internal Controls for Financial & Tax Compliance

The key internal controls mentioned above will solve most of the problems of the UAE entities. However, to ensure compliance with tax laws and regulations, firms must apply controls to comply mainly with:

• Corporate tax law and related regulations
• Value-added tax law and related regulations

Furthermore, firms must also ensure to other relevant laws, such as tax procedures laws, commercial law, and so on. It is advisable to consult a tax consultant, CZTA, to ensure compliance. Some key internal controls for financial and tax include the following.

Detailed Tax Compliance Framework

Every business has specific circumstances; therefore, entities must highlight the relevant laws and regulations applicable to them. This can be in the form of a document highlighting key deadlines, tax calendar, and other compliance requirements.

Segregation of Duties

There should be separate duties of personnel concerning the bookkeeping, tax filing, and approval.

Tax Records Maintenance – Documents Preservation and Retention Controls

Firms must ensure tax records as per applicable laws and regulations, and FTA guidelines. For instance, firms must maintain corporate tax records for at least 7 years from the end of the relevant tax period. There must be controls in place, such as access controls, to restrict access to sensitive tax information. For instance, the credentials of EmaraTax must be available only to relevant people.

Transfer Pricing Controls

Businesses must formulate systems and processes within the organization that result in adherence to the UAE transfer pricing regulations.

Reconciliation and Monitoring

Organizations must ensure regular reconciliation between accounting records and tax filing. In this way, they will be able to monitor any discrepancies on time.

Strengthening Controls without Slowing Growth

Internal controls generally do not result in slowing the business growth. The question is how these are implemented? If smartly, then there is normally no issue at all. The ideal way is keep everything in order with stringent controls from day one. In this way, the business will nourish and progress with the internal controls without any operational disorder.

Some of the common measures of strengthening internal controls include:

• Providing training to employees on internal controls and compliance matters
• Implementing important controls, not throwing excessive checks
• Automating processes where applicable
• Using trusted external services only, such as for cloud-based data storage
• Regular review, monitoring, and reconciliations.
• Taking professional guidance, such as from CZTA.

When to Review & Upgrade Internal Control Systems

As part of the overall corporate governance structure, it is always recommended to review internal control processes regularly. This is to ensure that the business is aligned in the proper direction to face any risks. However, there are times when they must upgrade the controls. Let’s highlight some of the common reasons to upgrade internal control systems. Improve when

• Any changes in relevant laws and regulations
• Business expansion
• Consistent errors and omissions in financial data
• Occurrence of fraud
• Receipt of compliance notices
• Unusual staff turnover
• Unusual or inconsistent financial results

These are just indications when a business might need to upgrade internal controls. The aim is to understand the importance of internal controls in the UAE and implement them accordingly.

Summary

Businesses, specifically the fast-growing ones, must understand the importance of internal controls in the UAE. The existence of strong controls not only minimizes the potential risks a business may face but also protects it from financial inaccuracies and misuse of assets. Furthermore, they indirectly improve a business’s reputation in the commercial world. Key internal controls, such as segregation of duties, financial and access controls, must be in place in every business. However, organizations must review the controls regularly and adapt and enhance them accordingly. When it is a matter of business assets and repute, it is never too late to consult an expert.

Creative Zone Tax & Accounting (CZTA)

Businesses in the UAE must have strong internal controls. Some firms do have an internal audit function; however, there is an option to outsource it. We, as qualified auditors, can assist in the overall internal audit of your business on a regular basis. From formulating and strategizing internal controls to internal audit, contact us for our services.