Establishing strong internal controls within your organization is key to protecting it from embezzlement, asset misappropriation, and other types of fraud. But, if you’re a small business with limited time and resources to implement internal controls, what do you do? You have options, even with a small accounting team. You can strengthen the effectiveness of your organization’s controls and protect it from fraud. Here are four areas you can focus on.
1. Outgoing payments aka cash disbursements
If possible, you should segregate all duties involved in this process. One person should have access to the checks. Another should have access to the general ledger and manage disbursement entries. Another should have the authority to sign checks. Ideally, this should be the owner or manager. That way, the owner can see how the company is spending its money. If a payment shouldn’t go out, someone in this process should be able to flag it. If one person is managing all of these tasks, it’s easier for that person to embezzle funds.
Want to go one step further? Require two signatures on any checks above a certain amount. This practice tightens your controls more and will flag any large sums going out the door.
If you’re not able to divide duties between multiple people, you can set up a payment system with your bank for cash disbursements, such as positive pay. Positive pay is a fraud-prevention system. You provide a list of checks and corresponding check details to your bank. The bank compares that list to the actual checks issued, looks for any discrepancies, and alerts you if they find any. Then, you can tell the bank if the check is approved to send.
2. Incoming payments aka cash receipts
If your business receives money via mail, there are several ways to implement controls. The route you choose may depend on the size of your business. If possible, require two individuals to open the mail together. As one opens, the other should create a list of the money received. When someone deposits the funds (hopefully another individual), she should compare the funds against the deposit slips. Another good control is making daily deposits.
If two people aren’t available, consider setting up a lockbox at your bank for all incoming payments. Or, the business owner should open all mail. It may be worth investing in an online payment feature and give customers a way to submit payment that goes directly into your company’s bank account.
3. Personnel practices
Perform background checks before hiring key employees, especially if those employees will handle cash or other high-risk assets. Consider installing security cameras. Set a high standard at the management level.
If you don’t respond quickly or effectively when theft occurs, employees may think it’s permissible.
4. Processing payroll
Your payroll oversight may vary depending on whether you process payroll in-house or outsource to a provider. With either option, you should have checks and balances in place to catch any abnormalities – significant increases in hours or pay rates, new employees, or changed payment methods.
You may be able to set up alerts to flag these changes and require approvals before processing. You may also choose to request a change report to look for any changes that were made from one payroll period to the next. Someone outside of the payroll function should review this change report.
If you run payroll internally, consider segregating duties. Different people maintain personnel files, maintain the general ledger, have access to the payroll system, and pay employees. Again, breaking up who does what can help deter fraud from happening and flag it if there’s an attempt.
If your company fails to implement strong internal controls, it’s more vulnerable to fraud. These basic practices can help establish some preventative measures to prevent any activities that could harm your business. If you need help implementing internal controls, we can help. We’ll review your company’s operations and processes to assess its risk. Then, we can provide recommendations on how you can best establish effective internal controls.
Originally published 2/26/2014. Updated 4/22/2020.
Have questions about establishing strong internal controls within your business? Let’s talk!