Business owners should implement internal controls to protect assets and property. These procedural measures include access restriction (petty cash, safes, software and more), locks, physical security barriers, and surveillance equipment.
But internal controls also include policies and procedures that protect accounting and financial information, cash and other assets, and company records.
In an effort to reduce the risk of fraud, business owners must implement systems and processes to maintain an environment that deters fraudulent activities by employees and management.
And yet some businesses don’t have internal controls or the ones they have aren’t strong enough. It’s a problem that may lead to bigger problems in the future.
Why Business Owners Need to be More Aware?
Business owners, how aware are you of what’s going on in your business? Do you have your finger on the pulse of what’s happening with your accounting procedures and marketing? Have you checked in with your employees to ensure they’re doing their jobs properly? Or have you assumed everything is fine? If it’s the latter, you may want to become more aware of what is happening in your business.
One of the key pieces is the identification of a lack of internal control – some business owners’ fall short of being aware. It’s one of the biggest conversations CPAs have with clients. The reason is in many cases accountants deal with small business owners who don’t have a large budget. Plus, some are sole proprietors, so they may not even think about internal controls. On the flip side, small business owners may work with a subcontractor (outsourced) whom they may have given too much authority.
Business owners who pay attention to day-to-day operations have a stronger chance at preventing and recognizing fraudulent activities. Internal controls can save you time and money in the long run.
Examples of Internal Controls Your Business Needs to Reduce the Risk of Fraud
Keep in mind that small businesses with 30 or 40 employees usually have implemented some internal control. However, when you’re talking about the smaller business with practitioners, bookkeepers, consultants, CPAs, and people who are going in as outsourced CFOs, the internal control process is meant to minimize risk. Most don’t expect that risk is eliminated entirely in any situation in life. Right?
When outsourced personnel work with small businesses, they know not to expect or overwhelm owners with a million internal controls. A CPA may say, “Oh my goodness, look at this. We’ve got 60 internal controls we need to implement. Hey, business owner! Here’s a $50,000 engagement.” It’s scary!
It’s important to take it one step at a time. A CPA may say, “Hey! Let’s control the situation. I know there are a bunch of internal controls. We’re seeing so many high-level risk areas for you. Let’s prioritize those risks and take them one at a time and implement an internal control.”
What are some examples of international controls? Here are a few.
Dual-Signature on Company Checks – To protect company assets, have two authorized signatures on all company checks. Why? Because two people must agree that the payment is appropriate and legitimate. This can reduce employee and management theft and prevent fraud.
Segregation of Duties – If one person has check-signing authority, they should not have bank reconciliation authority. You always want two pairs of eyes reviewing the information. Then once that sort of table stakes game is in place, you can start putting in other measures and layering those one at a time.
Trustworthy Personnel – An employee who stays late and always the last one out the door may be suspicious to your CPA. Why? Because there may be something wrong. However, you, the business owner, may think, “Oh she’s such a hard worker for staying late. It’s wonderful!” But your CPA may have another viewpoint and advise you to put a camera on your employee’s desk immediately.
Are You Ready to Declare War on Fraud?
When you started your business, you probably didn’t think about the internal controls you may need, even if you’re a sole proprietor. It doesn’t matter if you have 100 employees or if it’s only you, it’s important to have policies and procedures and systems and processes in place to you protect you and your business from the risk of fraud.
Want to know how your business can stay compliant and on track? Read this blog post now!