Quick fact: Poor financial controls can lead to duplicate payments, lost invoices, employee fraud and incorrect tax returns. Accounting errors can be very costly for a UAE business that is going to be dealing with 5% VAT and Corporate Tax.

For example, a Dubai trading firm pays the same supplier invoice twice. No-one notices until the next supplier statement comes through.

Or an employee changes their bank details in the payroll system without authorisation.

This isn't necessarily the result of deliberate fraud. Sometimes it's just that the business doesn't have a good checking process.

Internal controls can be of huge benefit to a UAE business in that they can catch errors before they impact cash flow or compliance. As businesses are increasingly required to deal with VAT returns, Corporate Tax returns and ever more detailed financial reporting,

internal controls are a great way of catching errors.

Takeaway

Financial internal controls help UAE businesses to avoid accounting errors, unauthorised payments and financial fraud. Simple things like payment approvals, bank reconciliations, restricted software access and regular audits can make a real difference. They also help a business to maintain accurate records, manage its cash flow and comply with the UAE VAT and Corporate Tax requirements.

What are Internal Financial Controls?

Quick Answer: Financial internal controls are the policies, procedures and controls that a business puts in place to protect its cash, ensure its accounting records are accurate and to prevent fraud and error.

They're used for some main reasons: protection of business assets, reliable financial reporting and regulatory compliance.

For example one internal control could be that a manager’s approval is required prior to any payment being made to a supplier. So could be the reconciliation of the bank statements with the accounts.

Controls won't eliminate all risk. They're there to help identify suspicious transactions and accounting errors.

Why are Internal Financial Controls Important for UAE Businesses

Key fact: The UAE’s standard VAT rate is 5% and corporate tax is generally applied at 9% on taxable income in excess of AED 375,000.

Corporate Tax and VAT Filing

Reliable invoices, expense records and supporting documentation are absolutely essential for a business to work out its tax liability correctly.

A bad purchase recording could impact the recovery of input VAT. If the expense documents are missing you could have problems in working out your taxable income.

Financial controls maintain a record of who entered the transaction, who checked it and who approved it.

Accounting Mistakes and Fraud

Small businesses will typically have one accountant to deal with the invoices, the payments and the bank reconciliations.

Is that convenient? Absolutely.

However if no-one else is checking that person's work then the unauthorised transactions could easily go unattended.

Banking and Free Zone Requirements

Banks and investors may demand audited financial statements as a condition of lending or investment.

Some of the free zone businesses are also subject to financial reporting and audit requirements depending on the authority and regulatory regime.

Good records make the process straightforward and minimise the need for last minute fixes.

8 Must-Have Financial Internal Controls for UAE Businesses

Verdict: Strong internal controls are predicated on clear lines of responsibility, documented approvals and regular financial checks.

1. Separation of Duties

The person creating the supplier payment should not be the one approving and releasing the payment.

Ideally different staff should be authorising the transactions, making the accounting entries and having access to the funds.

Smaller companies may not have the headcount to fully segregate the duties. In that situation the owner can of course go through the bank payments and the supporting invoices themselves.

2. Approval Hierarchy and Authorization Limits

If you’re buying equipment for AED 50,000, it's not the case that the approval process is the same as it would be for an AED 500 purchase.

Businesses can set payment limits both by transaction amount and by responsibility.

For instance:

Dept Manager: purchases up to 5,000 AED.

Finance Manager: AED 5,001 – 25,000

MD: amounts over AED 25k.

The key is to record who can approve what and ensure that staff can’t get around those limits.

3. Routine Bank Reconciliations

Quick check: every bank transaction should have a matching accounting entry or an explained reconciliation difference.

Bank reconciliation is the process of comparing the bank statement with the company's accounting records.

It can find duplicate payments, missing deposits, bank fees and transactions recorded in error.

Monthly reconciliation is a perfectly sensible minimum for a lot of businesses. Weekly reconciliation can be a real benefit for those that are making a lot of payments.

Ideally someone who doesn’t work in payments would do the reconciliation.

4. Controls of Accurate Bookkeeping & Accounting Software

It reduces manual errors. If however the access to software isn't controlled by the users then it becomes a whole new problem.

It shouldn't be the case that someone who's entering in the invoices can go on to delete accounting records or change the tax settings.

Businesses should establish:

Role-based access control.

Audit logs that show transaction changes.

Settings for VAT compliant invoice.

regular backups of data.

You should also be looking at the access permissions when people change roles or leave the company.

5. Controls on VAT and Corporate Tax Compliance

Key point: UAE VAT records are normally required to be kept for 5 years whereas Corporate Tax records are normally required to be kept for 7 years.

Finance teams will of course have a tax compliance calendar in place which will cover registration requirements, the return deadlines and the payment dates.

Check the sales invoices, the purchase records, the VAT calculations and the relevant adjustments prior to sending.

Corporate tax calculations also have to be reconciled with the accounting records.

Keep your supporting docs organised and easy to access. Filing a return doesn't mean you can just walk away and not have any evidence.

6. Payroll and WPS Controls

Payroll errors can have a direct impact on the employee and can also give rise to compliance issues.

Check the employee details, attendance, approved leave, overtime and any salary changes prior to processing the salaries.

The employer must ensure compliance with the relevant requirements relating to salary payments where the employer is subject to the UAE WPS.

An authorised person should review the payroll prior to it being submitted.

Changes to employee bank accounts should be subject to additional verification, particularly if the request is made suddenly.

7. Procedures for Cash and Petty Cash

Petty cash is for small office expenses, transport and emergency payments.

Individual amounts are pretty modest so it's not uncommon for businesses to fail to keep proper documentation.

Set a limit on the petty cash, get the receipts and track all the withdrawals.

Carry out surprise cash counts on a regular basis.

Even if it's just AED 100, if it's happening repeatedly then it's worth looking into.

8. Internal Auditing and Periodic Review

Internal reviews check that staff are complying with the established procedures.

Review the payment authorisations, the expense reports, the reconciliations, the payroll records and access to the accounting system.

Larger companies may have in-house auditors. SMEs can have periodic independent reviews or can of course just contract the work out.

Findings should lead to corrective action with clear assignment of responsibility and clear deadlines.

UAE Business Internal Controls Checklist

Quick Check: Use this checklist to identify gaps in your current financial processes.

Separate the functions of payment preparation and approval.

Put spending limits in writing.

Regularly reconcile bank accounts.

Restrict access to the accounting software.

Keep a close eye on the VAT and Corporate Tax filing due dates.

Check payroll before processing salaries.

Record petty cash transactions.

Make sure regular, independent financial reviews are in place.

Common Internal Control Errors to Avoid

Warning: The vast majority of control failures begin with staff ceasing to follow procedures or with responsibilities simply not being checked.

Relying Solely on One Employee

One person handling purchasing, payments and the accounting records is a source of unnecessary exposure.

Carry out independent audits even if you can't afford to employ any more finance staff.

Operating Without Written Procedures

Verbal instructions are easily forgotten, particularly when the people you're giving them to go on to work for someone else.

Record approval rules, reconciliation procedures and reporting responsibilities.

Disregarding System Access Reviews

Former employee access to the accounting software can result in sensitive financial information being exposed.

Regularly review the permissions and remove any access that isn't required right away.

Final Thoughts

Financial internal controls needn't be complicated procedures or expensive systems.

For so many UAE SMEs the starting point is actually quite simple: get the payments approved, do the reconciliations, protect the records and check the tax calculations prior to submission.

The goal is not to create more paperwork. It’s about accounting for business money and making sure that financial decisions are supported by records that someone’s actually looked at.

FAQs

What are the principal internal financial controls in place at a small business in the UAE?

Start with the fundamentals. All payments to suppliers must be approved, bank accounts must be reconciled on a regular basis and access to the accounting software must be restricted. Small businesses should also have a look at their VAT records, their payroll and their expenses. You don’t need a big finance team to put these controls in place.

How often should financial internal controls be reviewed by companies in the UAE?

For the majority of small and medium sized businesses a monthly review is a sensible starting point. You should be looking at your bank reconciliations, your payment approvals and your odd expenses on a regular basis. You can go further and do a more detailed review on a quarterly or annual basis. If you're dealing with hundreds of transactions a week then of course some of the controls will need to be looked at more frequently.

Can a UAE business operate without an auditor and still have internal financial controls in place?

Yes, a lot of the routine checks can be carried out by the small business themselves. The owner can look at the supplier payments, do the bank reconciliations and go through the monthly financial statements. An external accountant can of course assist with the periodic independent reviews. That said, any company that is subject to a mandatory audit will still have to comply with that requirement.

How do internal financial controls assist in the prevention of errors in respect of VAT and Corporate Tax?

The vast majority of tax errors happen due to incorrect invoices, missing expenses, or transactions being posted into the wrong account. Our financial controls are in place to pick up on these sorts of issues prior to the returns being filed. We have regular reconciliations, document checks and approval processes in place to support the VAT claims and the Corporate Tax calculations should the FTA ask for records.

Financial Internal Controls Every UAE Business Needs

What are Internal Financial Controls?