A lack of basic internal controls can leave
your company vulnerable to pilferage, embezzlement, and other types of
misappropriation.
Small firms generally can’t afford to hire
internal auditors or set up separate divisions to break up duties. But even
smaller companies can establish controls in certain high-risk areas, such as
the following:
Cash disbursements. If at all
possible, the owner/manager should sign checks. This control has a dual purpose:
management sees how the company is spending its money, and the cash
disbursement function is kept separate from bookkeeping or accounting. If the
same person signs checks and enters disbursement transactions in the accounting
records, embezzlement is harder to prevent. Requiring two signatures on checks
above a certain amount also provides greater control.
Customer collections. Consider
having the owner/manager open the mail, especially if customer collections are
a regular part of your business. Alternatively, you might ask someone separate
from the accounting function to open the mail and prepare the deposit slip. Of
course, the practice of making daily deposits is also a good control.
Personnel practices. By taking care
to perform background checks before hiring key employees, especially those who
will be handling cash or other high-risk assets, you can prevent problems later
on. Of course, financial pressures, addictions, and other factors can corrupt
even good employees.
Perhaps a small business’s greatest control is
the “tone at the top.” If management sets a high standard, employees generally
follow. However, if a manager is perceived as lax – for example, he or she
doesn’t respond quickly when evidence of misappropriation surfaces – employees
might conclude that theft isn’t such a big deal.
Remember this: A company that fails to
establish minimum controls is providing a golden opportunity for fraud. If
you’d like help reviewing your firm’s controls, give us a call.
