Preventive controls are proactive measures or procedures put in place to prevent undesired events or risks from occurring. These controls are designed to deter problems before they arise. They are integral to a strong internal control system and are used in various industries, including accounting, IT, and operations.
Preventive controls can include a variety of measures, such as:
- Segregation of Duties: This means dividing responsibilities between different people or departments to prevent fraud or error. For example, in a financial context, the person who records the transactions should not be the same person who has the authority to authorize the transactions.
- Access Controls: This includes passwords, identification cards, and biometric scans to prevent unauthorized access to sensitive data or physical resources.
- Physical Controls: This involves measures such as locks and alarm systems to protect tangible assets, like equipment and inventory.
- Authorization Controls: This involves setting up approval processes for tasks such as issuing refunds or making large purchases.
- Employee Management: This includes hiring competent personnel, conducting background checks, providing appropriate training, and enforcing strict job descriptions.
- Preventive Maintenance: Regular maintenance and inspections of equipment and facilities can prevent breakdowns and accidents.
All these preventive controls help in mitigating risk, protecting assets, ensuring accurate financial reporting, promoting operational efficiency, and encouraging adherence to policies and regulations.
Example of Preventive Controls
Let’s consider a company that handles sensitive customer data, such as credit card information. The company could implement the following preventive controls:
- Segregation of Duties: The duties are separated so that the person entering customer data into the system is not the same person who can authorize changes to the system’s access controls. This would prevent a single employee from both entering false information and authorizing fraudulent transactions.
- Access Controls: The company uses secure login credentials (such as usernames and passwords), two-factor authentication, and firewalls to ensure that only authorized employees can access the customer data. This would prevent unauthorized access and potential data breaches.
- Physical Controls: The company’s servers are located in a secure room with locks and surveillance cameras. This would prevent unauthorized physical access to the servers that store sensitive customer data.
- Authorization Controls: The company sets up an approval process for any changes to the customer data. This means that before any changes are made, they must be approved by a manager or another designated authority.
- Employee Management: The company thoroughly vets new hires, particularly those who will have access to sensitive customer data. It also provides regular training to its employees on the importance of data security and the company’s specific procedures.
- Preventive Maintenance: The company regularly updates and patches its systems to protect against potential cybersecurity threats. It also regularly backs up its data to ensure that it can be recovered in the event of a system failure or data loss.
These are examples of how a company might use preventive controls to protect sensitive customer data, which is crucial for maintaining customer trust and avoiding potential legal and financial penalties.