Posts by Chris Roush, CPA:
Will the lack of internal control procedures result in the untimely demise of your business or organization? Studies show that if you don’t take action against fraudulent behavior today, tomorrow could be too late. The term “fraud” covers a lot of ground and includes actions that ultimately affect the accuracy of your financial statements. In fact according to the Association of Certified Fraud Examiners (ACFE), entities without internal control procedures are more likely to make errors on their financial statements and more likely to be victims of fraud, which is why it is so important for you to protect your business or organization with procedures that ensure accuracy and reliability of these records.
“The presence of anti-fraud controls is associated with reduced fraud losses and shorter fraud duration. Fraud schemes that occurred at victim organizations that had implemented any of several common anti-fraud controls were significantly less costly and were detected much more quickly than frauds at organizations lacking these controls” (ACFE, 2014).
Improve Accuracy, Eliminate Fraud
When you implement internal control components into your management strategy, you not only deter fraudulent behavior, you help improve the overall quality of your financial statements, which could result in improved transparency, fewer external audit findings and even additional growth and sustainability. Start establishing internal controls today by incorporating these five components into your daily business or organizational activities.
- Control environment – There’s no doubt about it, when it comes to setting the tone of your business or organization, all eyes are on you. Employees, volunteers, management and even the general public are more likely to “walk the walk” AND “talk the talk” if they see that you hold them and yourself to the same expectations. When leaders demonstrate a good ethical and moral framework, appear to be approachable about all issues and a commitment to excellence, nearly everybody takes notice and adjusts their behavior accordingly. It also helps to develop a rapport with your management team to encourage engagement throughout all levels of leadership.
- Risk assessment – Whether formal or informal, a risk assessment is critical to the process of identifying areas in which errors, misstatements or potential fraud is most likely to occur. By conducting a thorough risk assessment, you can identify which control activities to implement.
- Control activities – The best way to safeguard your business or organization is to segregate duties. This means that you should have different employees managing different areas of the company’s accounting responsibilities. When you put one person in charge of your accounting process you are freely giving them the opportunity to alter documents or mismanage inventory – and it’s a clear indication that you have weak internal controls. Dividing the work among your other employees is critical to the checks and balances of your company or organization. It’s also a good idea to develop procedures for recording, posting and filing documentation. Here are a few activities to get you started:
- Reconcile bank statements.
- Require documentation with expense reports.
- Match invoices with the goods and services you received prior to paying off your accounts payable balances.
- Make sure the person who has access to your business assets is different from the person responsible for the accounting of those assets, which will establish a form of checks and balances.
- Information and communication – Providing your employees with information about the internal control process and the resources available to them is a critical component to your success and the overall success of the internal control activities. In fact, simply knowing there are certain controls in place to promote accuracy and prevent fraud is enough to stop problems before they even start.
- Monitoring activities – Your job doesn’t end at the implementation of your internal control procedures; in fact, it’s just beginning. For your internal controls to work (and work well) you must establish your monitoring activities – and monitor frequently. Establishing internal controls is great, but they will have no effect if you neglect to monitor them. Furthermore, your internal controls should grow with your business or organization to ensure their long-term effectiveness.
Risk management and internal controls are necessary for the long-term success of every business and organization and a financial statement audit is a great way to provide you with insight into the internal controls of your organization or business. This kind of review structure can potentially reveal problems you didn’t even know were there – including fraud. But what if you are not planning on conducting an audit on your financial statements this year? Another option could be to work with a CPA who can help you document an understanding of the design and effectiveness of your internal control policies as a way to reassess your current strategies and identify areas for improvement. Email Rea & Associates to find out what options are available and how internal controls can put a stop to fraud in the workplace.
By Christopher A. Roush, CPA (Millersburg office)
You want the best for your business, so it only makes sense that you surround yourself with like-minded individuals. As a business owner it’s important to get support from business advisors who have expertise in specific areas to help you make your business successful. Your CPA plays a critical role for you, but don’t forget about the others. It’s also important to cultivate relationships with a business attorney and business banker.
Your CPA can make sure that you have systems to capture and report timely, reliable financial information and, if needed, even provide assurance regarding your financial statements. A good attorney can help safeguard your business assets and provide assistance in drafting agreements, contracts and other legal proceedings. A business banker can provide lines of credit or loans to help meet the cash flow needs of your business.
The Importance of Your Banking Relationship
Strong banking relationships are built over time through regular two-way communication. You should be well-versed in upcoming cash needs, such as expanding inventory or the increased needs of personnel cost, and communicate these to your banker. As you keep them informed of business decisions and trends, this helps to build a lender’s confidence in your ability to manage your business. A well-informed and communicative business owner may be given extra consideration when business financial issues arise.
Four Key Indicators That Help Bankers Evaluate Your Ability To Repay
Banking is a low-risk industry and they have one major concern when lending money: your repayment. They evaluate your ability to repay based on these four areas:
- Cash Flow – This is a key indicator of your ability to repay the original loan. If you have strong cash flow, the chances are high that you are able to repay your loan.
- Collateral – When a loan is originated, it’s never the goal for the loan to be foreclosed on and collateral seized, but it is required as security.
- Credit – Another key indicator is your credit history and track record of your past ability and willingness to fulfill prior financial obligations. If you have a good credit score, you’ll be given more favorable treatment in both the receipt of a loan and the amount of interest charged.
- Character – Your relationship with your banker allows them to consider your integrity. It’s critical to let your actions meet or exceed the expectations your words establish on a regular basis.
A good business banker is your advocate – they’re in your corner. Like CPAs, business bankers are exposed to multiple businesses and industries and they can be a great sounding board for ideas and help you strategize on ways to reach your financial objectives.
Business Relationship Help
Need to round out your business advisory team? Contact Rea & Associates. We can provide accounting services and business consulting services to your business, but we can also connect you to other business professionals that can help you complete your business advisory team.
Author: Chris Roush, CPA (Millersburg office)
Looking for more information on how to strengthen your business? Check out these blog posts:
Do you realize that your business’s financial statements are a valuable management tool for decision making? You may be thinking, “Well, I just get them done because the bank needs them for my loan file,” or, “I think I have a copy in a drawer somewhere.” But if you take the time to understand your financial statements, you’ll be surprised to find that they can give you information on the condition of your company and allow you to make better business decisions. Read the rest of this entry “
Internal controls are procedures that companies develop to safeguard their assets and to produce accurate, reliable financial statements. When a company doesn’t have strong internal control procedures, fraud can occur much easier. Other issues that can arise include inaccurate financial statements, the inability to find certain documents such as invoices or purchase orders, or a higher than usual number of customer complaints. Read the rest of this entry “
Big GAAP vs. Little GAAP has been a hot topic in recent years. (Okay, “hot” topic may be a stretch…) The question of the hour is: Why should a privately held company with close relationships to owners, bankers, insurers and other financial statement users need to comply with the same complex rules and extensive disclosure requirements that a publicly traded company is held to? Read the rest of this entry “
Inventory management can have a very direct impact not only on your profit but also the cash flow of your business. Inaccurate inventory will directly affect your business profit. If the inventory is too high, you may be paying tax on higher profits than you actually have. If it is too low, you run the risk of understating taxable income and, if audited, the IRS can hit you with back taxes and penalties. Read the rest of this entry “
Could you be charging more for your products or services? Every smart business owner is continually analyzing people costs and product and market profitability. Read the rest of this entry “
Private companies have a once in a lifetime opportunity to express their concerns to standards setters that private company financial reporting is far different from publicly traded ones – and as a result financial reporting standards should be created and governed by an independent private company board. Read the rest of this entry “
Developing a credit record for your business that is separate from your personal credit record is important as your business grows. It can lead to lower rates on loans and leases as well as protect your personal credit record. The Better Business Bureau offers these tips to establishing business credit. Read the rest of this entry “
At Rea & Associates, we believe some elements of Generally Accepted Accounting Principles, or GAAP, create an excessive burden for closely held businesses and the accounting firms that serve them. Although GAAP principles work well for publicly-traded businesses, financial reporting requirements as a result of some of the principles take a great deal of time to prepare and result in additional accounting expenses for our clients – without providing any benefit to the businesses or those who use the financial information. Read the rest of this entry “