You often hear the term "internal controls," but what does this mean to you and your business?
Internal controls are defined as processes designed to provide reasonable assurance regarding the achievement of certain objectives. They are affected by the organization's management and other personnel. Basically, internal controls are an important step to help safeguard assets against unauthorized acquisition, use or disposition. With all the talk of corporate fraud these days, internal controls can help minimize the risk of employee theft or fraud occurring in your organization.
Internal controls should be communicated to all personnel involved and monitored by management to ensure compliance and to determine if they are working properly or need to be modified. Strong internal controls generally rely on segregation of accounting duties, which prevents a single employee from both perpetrating and concealing fraud. Many small businesses don't have the appropriate number of personnel to handle such segregation.
Cash
- Preparing timely monthly bank reconciliations is a key control over cash. This basic process can help prevent and locate unauthorized uses of cash in a timely matter. If cash is only reconciled once a year, an employee could be stealing for twelve months before it is discovered.
The owner of the business should have the bank statement delivered directly to his residence (or receive it unopened at the office), and open and review the statement and cancelled checks. Cancelled checks should be reviewed for unfamiliar or unauthorized payees, forged signatures and unusually large dollar amounts. If cancelled checks are returned with the bank statement, the business owner should look for evidence of alterations to the checks. The bank statement should also be reviewed for debit memos, credit memos and unusual items.
- Consider using a lock box for your business. Lock boxes are provided by most financial institutions today. A separate mailing location is set up to receive all cash receipts directly. This reduces the risk of employees diverting cash receipts and manipulating accounts receivable records by writing off the balances. Since the financial institution receives the money directly, you have immediate access to the cash. In addition, the institution will provide you with a daily cash receipt report which includes a detailed listing of the source of the receipts. SIDEBAR Consider using a lockbox for your business.
- Consider bonding employees who handle money to safeguard against losses.
- Consider dual signature requirements on all checks over a pre-set amount. Lower-level management will be authorized to sign checks for routine expenses, but high-dollar cash disbursements will require the signature of the owner. This practice serves two purposes: it increases the difficulty for lower-level employees to commit fraud with high-dollar transactions, and it ensures the small business owner personally reviews large cash disbursement transactions.
- Blank checks should not be signed and kept for future use, even if held in a locked environment.
Accounts Receivable
- Accounts receivable aging reports should be reviewed monthly by management. Any amounts in the "over 90-day" column should be explained and followed up. If a customer is a slow payer, consider not working with them or waiting until the current job is complete and fully paid before beginning the next job.
- Receivable write-offs should be authorized and approved, in writing, by the owner. It would be helpful to keep a record of accounts receivable write-offs and to summarize these write-offs by project manager, billing clerk or other meaningful classifications. A trend may develop that would warrant further investigation by management.
- Where possible, use pre-numbered invoices and maintain a log of the invoices. A gap in numerical sequence may indicate a problem.
- Consider shifting the responsibility for collecting receivables to the project managers for their jobs. The project manager knows the status of the job and can communicate directly with the customer to speed up the payment process. This will also segregate the accounts receivable duties so that the employee responsible for entering cash receipts is not part
