You’ve probably heard about how critical it is to establish internal controls throughout your business. But if you happen to own a small or midsize company, you may have dismissed this best practice in favor of maintaining your daily operations, optimizing customer service and streamlining your growth initiative. While running a successful business greatly depends on your ability to manage a variety of responsibilities, don’t let yourself become complacent when it comes to protecting your lifework from fraudulent activity. The mistake of ignoring the importance of internal controls in your business could end up costing you greatly.
Who’s Watching Your Money?
Would you be comfortable asking someone to watch a briefcase full of your cash, say $100,000? What if it held $500,000 or $1 million? Are you confident that your money would be there when you returned? Believe it or not, that’s essentially what you are doing every day when you run your business without internal controls – you are willingly handing over full access to your most valuable asset.
How To Address Your Internal Control Needs
Even if you don’t have the resources to implement a comprehensive internal control structure, there are still options available that can effectively provide your business with a level of oversight. Before you get started, be sure to consider the difference between preventative controls and detective controls.
As the owner of a small- to midsize-business, you may want to consider implementing a strategy that takes advantage of detective controls, which are typically put in place for the purpose of reviewing data for human error while ensuring that your assets remain secure. One example of this type of control is when, after your accounts have been reconciled, a reconciliation review is conducted to ensure accuracy.
Because of their size, smaller companies are more likely to give a few individuals full access to their business’s funds. These employees are often in charge of making deposits, issuing checks, managing payroll and performing monthly bank reconciliations. Enacting detective controls will not only provide you with the peace of mind you need, it may help take weight off of the shoulders of a trustworthy employee who would rather not have their trust questioned.
Preventative controls, on the other hand, are established by companies seeking to ensure that something doesn’t happen in advance. An example of a preventative control is when transaction limits and segregation of duties are established. This type of control can be very effective, but are oftentimes more difficult for smaller companies to establish due to the lack of resources they can commit to such a strategy.
10 Ways To Implement Internal Controls In Your Business
- Document and re-evaluate your operational processes (at least) annually.
- Make sure that more than one employee is familiar with your company’s operational processes to protect your business against unforeseeable circumstances, such as sickness, job loss or death.
- Conduct monthly reconciliations of key accounts (i.e. receivables, cash, inventory, payables, payroll costs, etc.) Then have these monthly reconciliations independently reviewed.
- Implement an approval process for employee spending.
- Establish transaction limits.
- Restrict access to your company’s general ledger to only a few key individuals.
- Review your vendor lists to ensure that they are current and accurate.
- Assign someone to review standard and nonstandard journal entries.
- Form a policy for creating credit limits for customers – and review it regularly.
- Review whether there are other areas unique to your business where employees may be able to manipulate information and identify how to monitor them.
Putting internal controls to work in your business doesn’t have to be an overwhelming task and you don’t necessarily need to beef up your workforce to get started. Start by simply picking a few key controls that can be easily woven into your daily or monthly processes and begin implementing a few changes at a time. Before you know it, aspects of your internal control strategy will become so commonplace that you may begin to wonder how you ever got by without them.
Email Rea & Associates to learn more about the benefits of an internal control strategy.
By Michaela McGinn, CPA (Dublin office)