Many business owners are discovering that their assets are not as well protected as they thought. This is especially true in small business environments where a single employee manages all the finances. Often there are no “checks and balances” to verify that transactions are accurate.
When proper, consistent procedures are not in place, employees can learn to manipulate the accounting system to their benefit. Whether they steal money from the company or they make errors that go undiscovered, the end result can greatly impact your company’s management discussions, financial reports and tax filings.
Unfortunately, once your financial records have been altered, discovering problems is extremely difficult. Most standard accounting practices are not designed to uncover internal problems such as embezzlement.
Therefore, the best way to safeguard your company’s assets is to recognize and improve weaknesses in your internal control procedures. The following business practices can help you minimize potential internal control problems:
- Related duties should be assigned to different people. Certain accounting functions are designed to cross-reference each other for accuracy (writing/signing checks, ordering/paying/receiving materials, handling cash/recording cash, etc.). These procedures can reveal inconsistencies in your records in a timely manner.
- Reconcile and scrutinize your bank statements every month. A bank statement can tell you a lot about your business if you review the information in a timely manner. Review unopened bank statements and examine cancelled checks for proper endorsements and payees; track transactions between accounts; compare payroll checks with employee records, and ask questions about anything that you think is unusual.
- Review your cash disbursements records for missing checks. Sometimes, when an employee steals a check, that check number will be missing from your cash disbursements records. Periodically running a report for missing checks will show where gaps in the check sequence lie, prompting you to ask questions of your employees.
- Always ask for proof before you sign a check or authorize a transaction. When you insist on reviewing original documentation, your employees become more accurate and communicate their needs more clearly. You should also verify the names of your vendors and your employees occasionally. And, remember to cancel supporting materials after signing a check.
- Review your payroll records periodically. One way for an employee to steal from a company is to change their wages/salary in the payroll system or to create a fictitious employee. By reviewing payroll records periodically, you will prevent employees from altering the information in the payroll system without detection.
- Scrutinize credit card statements every month. If you give company credit cards to employees, review the monthly credit card statements and supporting documentation (such as receipts) to verify that the charges are for business purposes only.
- Scrutinize employee expense reimbursements. When employees submit expense reimbursements, supporting documentation (such as receipts) should be attached for each item on the request. You should review the attachments to verify the reimbursement was for a valid business purpose. In addition, receipts attached to expense reimbursement reports should always be the original receipt, not a copy. You should also consider matching mileage reimbursement requests to time cards, if applicable, to verify your employees actually incurred travel expenses on that particular day.
- Lock and protect your valuables. Keep blank checks and signature stamps secured (although we strongly recommend not even having a signature stamp), and deposit cash and checks daily. It’s also important to secure fidelity bonds and insurance for all accounting and key personnel.
- Know your employees and examine behavior changes. Always verify employee references and perform background checks before hiring. Many white-collar crimes go unreported and continue to be repeated. Watch for trouble signs: possible substance abuse, change in lifestyle, living beyond means, possessiveness of work or defensiveness when questioned.
These internal controls can help you reveal many discrepancies, as well as recognize the excellent efforts of your staff. Our firm can help you develop and implement internal controls to address the weaknesses you identified and/or your areas of concern. Please call us if you have any questions.