In today’s dynamic business environment, manufacturers and distributors face increasing challenges from supply chain disruptions, rising costs, and regulatory scrutiny. A robust internal control framework is no longer just a compliance necessity under Sarbanes Oxley or internal policy mandates – it is a strategic tool for navigating these complexities, enhancing efficiency, and safeguarding against fraud.

To meet these challenges, organizations must evolve their controls to reflect leading risk management practices grounded in industry standards, including PCAOB, ISO, COSO and NIST, and others. Central to this evolution is strengthening inventory, cost management, procurement, and fraud prevention controls. These critical areas support operational integrity, financial accuracy, and the alignment of strategic goals with day-to-day processes. Further underscoring the importance of these processes, Sarbanes Oxley and similar global regulations and frameworks emphasize the importance of robust internal controls over financial reporting (ICFR) for manufacturing and distribution companies across all industries and applicable jurisdictions. 

Addressing key controls and governance

1. Inventory controls: Precision in a volatile supply chain

Accurate and efficient inventory management is critical to meeting customer demands and maintaining profitability; yet many organizations face challenges such as overstocking, shortages, and inaccurate reporting due to outdated systems and insufficient controls.

To address these challenges, businesses should implement practices designed to enhance accuracy and operational efficiency:

• Cycle counting: Regular, risk-based inventory counts utilizing a cycle count methodology and framework, such as ABC cycle counting, can reduce errors and improve accuracy of inventory. This continuous oversight helps identify issues in real-time and allows for prompt corrective action.
• Discrepancy root cause analysis: Investigating discrepancies found during cycle counts helps identify and address underlying themes and issues, such as theft, data entry errors, or process inefficiencies. This prevents recurring issues and improves the accuracy of inventory.
• Technology integration: Implementing real-time inventory management systems improves accuracy and oversight by automating processes and providing continuous visibility into stock levels, order statuses, and inventory movements. Integration with procurement and sales systems provides seamless updates and enhances controls.

Accurate inventory reporting strengthens the reliability of financial statements and aligns with Sarbanes Oxley, regulatory compliance, and conforming to specific investor requirements. It also supports adherence to ISO 9001 standards, emphasizing quality and consistency in processes. By adopting these strategies, organizations can build a resilient framework for sustainable growth while overcoming today's supply chain complexities.

2. Cost management controls: Insights for better profit margins

Manufacturers must effectively manage production costs to stay competitive. By using robust costing methodologies – such as standard, average, or activity-based costing – businesses gain critical insights into cost drivers and can better improve budget accuracy for strategic decisions.

To implement these practices effectively, manufacturers should consider the following strategies for managing costs:

• Monitor Purchase Price Variance (PPV): By regularly reviewing deviations between actual and standard costs, organizations can detect emerging pricing trends and adjust budgets in a timely manner. This proactive approach not only enhances budgetary control but also supports more strategic procurement and operational decisions.
• Sample-based cost proofing: Implementing periodic validation of system-calculated costs against actual data helps ensure accuracy and prevents discrepancies that could cascade through financial reporting. This practice strengthens confidence in cost projections and aligns them with operational realities.
• Root cause investigation: When discrepancies in cost calculations do occur, addressing the root causes is vital. A systematic investigation helps identify and resolve underlying issues, reducing the risk of repeated errors, and helping ensure the integrity of financial data.

Beyond SOX and ICFR requirements, establishing continuous governance and improvement initiatives, such as Lean or Six Sigma, drives ongoing cost reductions and process enhancements. These methodologies focus on eliminating waste, optimizing resources, and enhancing efficiency, ultimately leading to a more sustainable financial performance.

3. Procurement controls: Safeguards against overspending and fraud

Unchecked purchasing processes can lead to overspending, inefficiencies, and fraud, putting manufacturers and distributors at risk. Implementing effective procurement controls is crucial to help ensure compliance, drive cost savings, and maintain operational integrity.

Compounding these challenges, the unpredictability of tariffs (Opens a new window)adds complexity to cost forecasting, and supplier sourcing and negotiations, making agility a key factor in procurement strategies. Fluctuating trade policies can drive unexpected cost increases, emphasizing the need for businesses to monitor regulatory changes and optimize procurement and inventory controls, while building flexibility into their sourcing practices.

Implementing the following practices can significantly enhance procurement processes:

• Segregation of duties: By separating responsibilities for vendor selection, purchasing, and payment processing, organizations can reduce the potential for fraud, errors, or conflicts of interest. In manufacturing and distribution, where complex supply chains involve multiple vendors and large purchase orders, this segregation helps ensure clear accountability and minimizes the chance of unauthorized or fraudulent transactions.
• Periodic vendor reviews: Assessing vendor performance, delivery times, and pricing competitiveness on a regular basis helps ensure that suppliers meet quality standards, while providing the best value. By avoiding complacency in supplier relationships, organizations can negotiate better terms, detect potential inefficiencies, and reduce dependency on any single vendor, ultimately providing a smoother supply chain operation overall.
• Approval processes: Purchase orders are often large and frequent, making it necessary to establish a formalized process for approving expenditures. By requiring pre-authorization for all purchase orders, organizations make sure there is alignment with operational budgets and business objectives. This process not only controls costs but also mitigates the risk of unauthorized or unnecessary purchases, which can strain financial resources and disrupt operational efficiency.

For SOX 404 and ICFR compliance, organizations must regularly evaluate and document purchasing controls. Accurate procurement documentation directly impacts financial statements and is key to maintaining reliability in financial reporting. By implementing these practices, businesses can reduce financial risks, improve transparency, and build a strong foundation for ethical, sustainable procurement practices.

4. Fraud prevention: Protecting organizational integrity

Fraud is a significant risk for manufacturing and distribution companies, especially with complex supply chains and high transaction volumes. Targeted fraud prevention measures are crucial for safeguarding operational integrity.

In addressing these risks, several practices stand out for their effectiveness in mitigating fraud:

• Vendor management: Maintaining an approved vendor list is critical in managing supplier relationships. Thorough vetting and verifying transactions against the list minimize the risks of unauthorized payments, fictitious vendors, and kickbacks. Regular updates help ensure alignment with evolving supply chain needs. 
• Bank reconciliations: Regular bank reconciliations help detect anomalies, such as duplicate supplier payments or unauthorized withdrawals. For manufacturers and distributors, this control is key to cash flow management, supports SOX 404 compliance, and is critical towards the early detection of fraudulent activity. 
• Expense reimbursement oversight: With frequent travel and logistics costs, manufacturers must enforce strict oversight of reimbursements. Detailed documentation, automated tracking, and periodic audits reduce inflated claims and improve accountability for field and sales teams.

Fraud prevention supports SOX 404 and ICFR requirements by mitigating risks of material misstatements while aligning with COSO’s risk management framework and ISO 37001 anti-bribery guidelines to promote transparency. Clear policies, robust training, and effective whistleblower channels foster a culture of integrity, helping ensure operational resilience and long-term success.

Looking forward: Embracing technology and agility

To strengthen internal controls, manufacturers and distributors should adopt innovative, technology-driven strategies that enhance efficiency, mitigate risks, and improve operational resilience, including: 

• Data driven decision making: Harnessing AI, machine learning, and advanced analytics can help optimize inventory levels, predict demand shifts, and mitigate supply chain risks. Predictive analytics help adjust production schedules based on real-time data, while AI-powered anomaly detection identifies procurement fraud and inefficiencies. Integrating these tools into an ERP and Warehouse Management Systems (WMS) enhances stock accuracy, reduces carrying costs, and prevents disruptions. 
• Emerging technologies: IoT-enabled sensors and RFID tags provide real time inventory tracking, minimizing stock shortages and overages. Automated alerts help ensure timely replenishment, while blockchain enhances supply chain transparency and compliance. Smart contracts streamline vendor approvals and payments, reducing invoice discrepancies and unauthorized transactions. These technologies strengthen internal controls, improve efficiency, and enhance trust in supply chain operations.
• Continuous improvement: Regularly assess and update internal controls to align with ISO standards, COSO, COBIT, and NIST frameworks; Sarbanes Oxley and ICFR requirements; and PCAOB guidelines. Data driven risk assessments and compliance monitoring help identify gaps and proactively remediate issues and problem areas. Governance, risk, and compliance (GRC) platforms provide real-time oversight, while automated audit trails enhance transparency. By leveraging technology, manufacturers and distributors can stay ahead of regulatory changes and maintain strong, adaptable internal controls.

By embracing these practices, organizations can align internal controls with strategic objectives, maintain regulatory compliance, and achieve sustainable growth in today’s dynamic and competitive environment.

Reach out to our team

Establishing a strong foundation of internal controls can significantly reduce an organization’s risk exposure to most threats. If you're looking to assess or tailor your internal control environment to better suit the unique needs of your business, our team is here to help. Reach out today, and we’ll help make sure your company is protected and well-positioned to meet your long-term business objectives.