What are Internal Controls, and why are they Important?

Internal controls are systematic procedures implemented to achieve operational effectiveness and efficiency, mitigate human error and fraud that will provide reliable financial reporting, and encourage compliance with laws, regulations, and corporate policies. It is a means by which an organization’s resources are directed, monitored, and measured. It plays an important role in detecting and preventing fraud, and protecting the organization’s resources, both physical (e.g., machinery and property) and intangible (e.g., reputation or intellectual property such as trademarks).

Good controls encourage efficiency, compliance with company policies, and seek to eliminate fraud and abuse.  It is a process companies develop and use internally for preventive and detective measures.  Therefore, if companies do not implement internal controls, they are taking a very large risk of fraud, human error, and operational inefficiencies that can be fatal for the company.

The U.S. Chamber of Commerce estimates that theft by employees costs American companies $20 billion to $40 billion a year.  To pay for it, every man and woman working in America today contributes more than $400 per year.

The most important way to deter employee theft is to be aware and prepared for the fact that it happens.  Dishonest employees avoid prosecution when managers refuse to accept the idea that trusted employees are targeting them.

Myths and Misconceptions*

  • Company does not need to have policies that cover employee theft because employees have common sense and know right from wrong.
  • Well-paid employees are less likely to steal.
  • Honest and loyal employees will report other employees who steal.
  • Employee theft is very minimal in comparison to the thousands of dollars from shoplifting.
  • New employees commit employee theft, while senior employees can be trusted.
  • Employee theft is detected in its early stages.

Facts and Reality

  • The opportunity to steal is more important than the need for money.
  • A majority of employee theft goes undetected by management.
  • Less than 10% of the employee population is responsible for mote than 95% of the total losses from employee theft.
  • Nearly every business experiences some degree of employee theft.
  • Nearly one-third of all bankruptcies is caused by employee theft.

In addition to the above, the Marquet International Ltd, a boutique business investigation, due diligence, litigation support and security consulting firm, conducted a study on employee theft and fraud in the United States in 2010 that resulted in the following significant findings:

  • 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 and accounting positions
  • The average scheme lasted more than 4 1/2 years
  • Nearly 2/3 of all incidents involved female perpetrators

So essentially this is telling us that the 67% of employees who are most likely to steal from your company will be a female who manages and maintains the company’s bookkeeping.  All that said, I’m sure you understand that any loss to a small business owner is significant.  Thus, if no controls are put into place and the culture of the company is open without the image of boundaries, policies and procedures, it will be completely vulnerable for theft, loss of revenue, and assets.  This is something small business cannot play around with and must take very seriously or it can mean the death of the company, the discontinuance of great product and services to your clients, and leave honest employees without a job.  There are no winners in these circumstances.

We at The Rascon CPA Firm are very passionate about helping our clients secure their business, revenue, and assets.  We offer a free initial consultation to discuss and review your situation around the company’s current internal control set up, as well as your budget to make any improvements.  Depending on your current set up there is some level of internal controls that can be implemented cost effectively.  The important thing is to develop a corporate cultural awareness that you, the owner/manager,  is aware of what is going on and there will be checks and balances in all transactions.

Give us a call today to schedule an initial consultation.  We will be glad to get to work to review and assess the effectiveness and efficiency of your company’s internal controls around its operating and accounting procedures to locate any weaknesses/deficiencies to enable you and your company to maximize on company production and profits.

Call us at (832) 482-4611 to see how we can help you.

*Offered from author and security professional John Case