Most, if not all, aspects of a business have an applicable financial value: raw materials, service offerings, even goodwill! That is why Accounting is appropriately its native language. Regardless if for personal profit or for a righteous cause, one way or another, every business’s goal is to earn money. Unfortunately, dealing with numbers also means dealing with financial mishaps. Because of this, internal control systems are necessary in order to:
- Prevent mistakes and slip-ups;
- Detect underlying issues right away; and
- Correct unintended errors and penalize fraud
Numbers Don’t Lie; But Sometimes, People Do
In a perfect world, are internal controls necessary? Probably not. However, such is not the world we live in.
Surely, you heard horror stories from peers and colleagues about businesses who had close encounters with fraud. Most stories end the same way: owners discovering the theft too late that the business has already lost a significant amount of money. Some businesses even had to file cases against former employees to help recover lost capital.
The unfortunate thing is that majority of such cases could have been avoided with ample internal control measures. After all, prevention is always better than cure.
The Need to Create Systems for Internal Control
These instances highlight the importance of internal control systems. By making sure that there are robust systems are in place, accounting fraud can be prevented, detected, and corrected.
Want to make sure your business maintains ethical practices? Below are specific measures that you can enforce.
7 Internal Control Systems for Your Business (With Real-World Examples)
1. Segregation of Duties
The first internal control measure refers to assigning key accounting duties to different individuals. In theory, they will be able to perform a check-and-balance system to prevent fraud. Through this, there is a lesser chance of collusion compared to having a single person do all the work.
Here are some ways on how you can apply this in your business:
- Cash – Manage this separately from the other accounts below to prevent misuse or having unbalanced accounts. Consider using cash alternatives like checks, credit and debit cards, online banking, etc. Your bank provides a detailed statement of account for these cash equivalents that will help you detect unusual activity.
- Accounts Receivable – A dishonest employee can accept payment and fail to deposit it in the company’s account. To apply segregation of duties, have one person manage sales made on credit by issuing credit memos. Meanwhile, get another person to receive the payment once it’s made.
- Inventory – One employee orders from suppliers, while another logs the goods in your system. This way, both can countercheck the number of items ordered versus the actual physical inventory.
2. Physical Asset Audits
Managing your assets—cash, inventory, ingredients—through records greatly differs from managing them physically. In reality, food items go sour, supplier orders may include faulty items, and disparities occur from what’s written on paper. As such, it’s wise to set a regular schedule for physical asset audits.
A good standard for the frequency of such audits is the movement of these assets. When managing cars in a dealership, counting once a month will do. Cars are huge items; it’s not too hard to monitor them subconsciously on the day-to-day. On the other hand, when you’re counting cash, at least once a day is best. After all, when there’s a lot of cash movement (think supermarkets), there’s also a greater opportunity for mistakes or worse, theft.
3. Access Control
Next, make sure that employees have leveled access to your accounting system. Think of it this way: if everyone can edit and approve your financial activity, errors are more likely to happen. If fraud takes place, it will also be more difficult to identify the culprit since a lot of people had prior access.
To apply this control measure, first, limit the access to your accounting system. This means only the relevant team should be able to access it. Then, set access levels as suggested below:
- Creator – Creates financial reports and submits it for initial approval
- Editor – Edits financial reports (if necessary) and forwards it for final checking
- Approver – Checks reports and prevents further editing alongside final approval
Unfortunately, most spreadsheet programs lack security features to ensure this recommended leveled access. At present, strict enforcement of this internal control measure is only possible with a computerized accounting system.
4. Required Approvals
Related to the method above, having several approval levels ensures that financial reports go through more than one pair of eyes. After all, it is less possible to miss an error when your accounting books pass through many critiques.
Want to learn how you can apply this to your business? Check out MPM Accounting. Made and managed by accounting experts, internal control measures like this are already embedded in the system. This lets you rest easy with required approvals and controlled access to your books.
5. Daily or Weekly Trial Balances
The same concept behind physical audits applies to this next internal control measure. Balancing figures on a regular schedule is a good way to prevent fraud. As such, it’s good to perform daily or weekly trial balances for your financials.
When dealing with balancing for several accounts, doing this process manually can be painstakingly slow. Good thing automation software like MPM’s can help. Whether you’re outsourcing or using the software in-house, generating a trial balance is as quick as a few mouse clicks!
6. Templates For Standardized Documentation
Remember Enron’s fraud earlier? They created complicated reports that, at first glance, make them look successful. In reality, their assets included made-up accounts and shell companies holding their debts and losses.
To combat this, make sure to set up standardized templates for financial reporting. The simpler, the better. That way, you can easily compare historical data and quickly identify anomalies when you see it.
7. Reconciliations (Banks, Suppliers, Credit Customers)
Finally, good internal control measures are not all, well, internal. To make sure that your account balances are up to date, check in with your banks, suppliers, and credit customers. In reality, checks take a day or two before they are credited, while some even bounce. Purchase orders might still be in transit as you finish up your books. All these time lags are normal and are part of business.
Quick Accounting Refresh: When using the accrual method, you record income when earned and expenses when incurred. This is regardless of the movement of cash. Because of this, your income for the month may not be equal to the amount of cash flowing inwards.
However, you’ll never know when theft kicks in. What if the check is not anymore in transit, but rather already deposited to a personal account? As such, regular reconciliation with important external parties help curb unethical activities.
In Business, Efficiency is Crucial
These 7 internal control measures are tried and tested to keep accounting ethical and accurate. The only downside, however, is efficiency. Truth be told, most of these systems involve extra work for you and your accounting team.
Automation is Key For Internal Control
Not to worry though. Thanks to advancements in accounting, enforcing these control measures don’t have to take a chunk of your time. Outsourcing your bookkeeping to experts, for example, will help you manage the day to day tasks and focus on overseeing your financial movement instead. Meanwhile, using automation software like MPM Accounting helps generate these trial balances and reconcile accounts in just a few clicks.
Want the best of both worlds? You got it! With MPM, you can start with an outsourced setup and shift to using our software in-house once you get the hang of it. In a nutshell, you get maximum flexibility without compromising on accounting accuracy. Click the button below to get started.
