What are 'preventive controls' in internal accounting?

Preventive controls in internal accounting are systems and measures specifically designed to stop errors or fraud before they occur. This proactive approach aims to minimize risks and enhance the integrity of financial reporting. Examples of preventive controls may include segregation of duties, access controls, approval processes, and comprehensive training for employees, all of which serve to ensure that potential issues are addressed before they result in actual discrepancies or fraudulent activity.

The focus of preventive controls is fundamentally different from other types of controls. For instance, measures that are designed to detect errors after they have occurred aim to identify and rectify issues in the accounting processes following their occurrence. Similarly, audits conducted at the end of the fiscal year generally assess compliance and the accuracy of financial statements but do not prevent problems from arising in the first place. Maintaining files for external auditors' reviews is an essential practice for transparency and compliance but does not constitute a control to prevent errors or fraud. Thus, the essence of preventive controls is to establish a strong framework that aims to eliminate the possibility of errors or fraudulent activities before they manifest.