Internal controls are processes and procedures designed to ensure that accounting data is properly authorized, recorded and reviewed to ensure its accuracy. These also include controls to ensure that physical assets are properly safeguarded to prevent misappropriation.
If you’re a small business owner, you may find that you often face limited accounting staff and are unable to re-create the “text book example” of a properly designed and effective system of internal controls. You may have an inherent lack of segregation of duties and it may not be economically feasible to add accounting staff.
According to the Association of Certified Fraud Examiners (ACFE), in 2012, small businesses ranked highest in occupational fraud frequency compared to large corporations, governments and non-profit entities. The ACFE cited billing schemes and check tampering schemes as being the most prevalent types of fraud perpetrated. Other types of fraud included expense reimbursement schemes, register disbursements, payroll schemes, cash larceny, inventory theft and financial statement fraud.
What You Can Do
While not all internal controls center around fraud, here are a few things small businesses can do to strengthen their internal controls:
- Establish written policies and communicate management’s views on positive ethical behavior. Have employees sign such policies to acknowledge their awareness and intent to adhere.
- Consider using background and/or reference checks on potential new employees, customers and vendors. Periodically review vendor, customer and employee lists from the accounting system.
- Segregate duties where it makes sense to do so. Even with limited staff, the more duties that you can effectively segregate between the available members of accounting and management, the stronger your internal controls can be. Have employees double-check each other for accuracy. Cross train employees to cover vacations and consider implementing a written accounting manual.
- Monitor the controls you have in place. In small businesses, management oversight and monitoring plays a key role in the success of the control systems. Perform surprise inspections periodically. Review bank transactions daily as well as cash receipts journals, cash disbursement journals, accounts receivable ledgers and aging reports, and accounts payable ledgers and aging reports.
- Physically guard the custody of assets such as physical cash, blank checks, inventory and equipment.
- Consider implementing outside services that employees can use anonymously. These could range anywhere from programs helping employees deal with outside pressures to services aimed at allowing employees to communicate questionable behavior they may have noticed without fear of retaliation or retribution.
This article was originally published in Illuminations: Facts & Figures from people with a brighter way, a Rea & Associates enewsletter, 3/12/2014.
Note: This content is accurate as of the date published above and is subject to change. Please seek professional advice before acting on any matter contained in this article.