As business owners we are all too familiar with the hard work that it takes to run a successful business, and all the intricacies that are involved to make that happen. While we are on our journey to achieving great success and materializing our brand we are involved with recruiting clients, managing employees, providing a great quality product or service, and implementing an effective strategic marketing plan, and therefore, may not be paying attention to some very key matters that we should keep a very close eye on for the security of our business. One of those key matters — the internal controls of our accounting system.
Implementing some level of internal controls is vital for every company’s survival, especially if you have a small business. Therefore, if you are a business owner and don’t have internal controls integrated within your business, it would be wise to pay attention.
Internal controls are defined as the measures an organization takes to protect life and property. Ranging from physical security, access controls, to rules of conduct and procedure, internal controls do not guarantee elimination of the risk of errors or fraud. But if implemented properly they can significantly minimize the risk of it happening.
Findings from a study of major embezzlement cases in the United States done in 2010 by a boutique business investigations company, Marquet International, Ltd., show that:
- The average loss was nearly $1 million
- The most common embezzlement scheme involved the forgery or unauthorized issuance of company checks
- Two-thirds of the incidents were committed by employees who held finance & accounting positions
- The average scheme lasted more than 4½ years
The type of industry your company is in will determine the type and level of internal controls to implement. In order to discourage possible embezzlements, business owners must take a hands-on approach and be proactive of all processes in the organization. Even companies with a little as 2-5 employees can implement effective internal controls without incurring a high cost to put into place.
Steps you can take to apply internal controls around the accounting process include:
- Develop an effective hiring and onboarding process to bring in good people
- Develop checks and balance procedures (i.e. approvals, authorizations, verifications) around each piece of the accounting cycle such as Invoicing, Receipt of Payments, Ordering parts and supplies, Payroll
- Reconciliation of all accounts
- Security of Assets
- Making yourself visible to let potential embezzlers know that you are involved in day-to-day financial and accounting related activities.
The Association of Certified Fraud Examiners suggests that small businesses are particularly susceptible to fraud and abuse because they generally do not possess large internal audit or investigative staffs to develop a fraud prevention program. Therefore, the focus for businesses with limited resources should be to maintain strong internal controls and build a fraud awareness program with employee participation.
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