Answers to Questions About Internal
Controls
One of the cornerstones of a successful business is a system of internal
controls. Yet many business managers ignore or pay little attention to this
critical need. This brief article answers several key questions about
implementing a system for your firm.
Q. What exactly are internal controls?
A. In an overall sense, internal controls are the procedures protecting your
company’s assets and permitting it to operate in an efficient manner. From
an accounting viewpoint, internal controls are the means for facilitating
your accounting system. The more complicated the system, the more important
it is to maintain internal controls.
Q. What happens if internal controls are not observed?
A. The result could be chaos and could even result in the eventual downfall
of the company. If you do not follow a system of internal controls, your
business becomes susceptible to wasted time, mistakes and, most importantly,
fraud. It is important to take steps now to ensure that internal controls
are in place and being maintained.
Q. How do you design a system of internal controls?
A. Start by segregating the duties of your workers. For these purposes, a
job can generally be divided into four components: (1) initiation; (2)
authorization; (3) custody and (4) recordkeeping. For example, the person
who writes the checks and has custody of the cash should not be the same
person making the accounting entries. Similarly, the one who initiates a
transaction should not be able to authorize use of the firm’s assets.
Ideally, the four functions should be handled by four different people,
thereby reducing the likelihood of fraud.
Q. How should you handle financial reports?
A. The best way is to set up a system of checks and balances. That means
using a reliable person to check the work of others at every phase of the
accounting cycle. Clearly spell out each person’s responsibilities so that
he or she understands them. The top managers should supervise the process.
Q. What else can you do to safeguard assets?
A. Protect valuable items and cash through the use of lockboxes, safes,
alarm systems, closed circuit monitors and other security measures. When in
doubt, use common sense and remove assets from accessibility. Don’t make it
easy for workers to fall victim to temptation. Key point: You cannot assume
that other managers are immune. Experience has shown that long-time
employees and higher-ups are more likely to embezzle funds than anyone else.
Before you hire a new employee, perform a background check and insist on
several references. Then make sure you call the references. Be especially
thorough if the new-hire is going to be handling the company’s funds. When
it is appropriate, bond anyone who handles cash or investments.
Final Word: Seek guidance from your
Somerset business advisors for implementing
or reviewing your
system of internal controls.
Wherewithal
is provided by Somerset for our clients and other interested persons
upon request. Since technical information is presented in generalized
fashion, no final conclusion on these topics should be made without
further review. For additional information on the issues, please
contact
a member of the firm. Somerset provides total financial solutions,
including accounting, assurance, information solutions, litigation &
valuation, tax, wealth management and management consulting services to
entrepreneurs and their businesses. This document is not intended or
written to be used, and cannot be used, for the purpose of avoiding tax
penalties that may be imposed on the taxpayer.
Somerset CPAs,
P.C.
3925 River Crossing Parkway, Third Floor
Indianapolis, Indiana 46240
317.472.2200 • 800.469.7206 • FAX 317.208.1200
www.somersetcpas.com
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