Establishing Internal Controls
There are four basic things that you can do in implementing an internal
system of controls:
applicants before they are hired.
- Periodically examine canceled checks to see if there is anything unusual.
- Take precautions in preparing payroll: have more than one person prepare
it, have several different people prepare it, or oversee it yourself.
- Have two people sign off on checks, preferably in front of each other.
While there is no foolproof system of accounting or internal control that
will absolutely prevent employee dishonesty losses, an environment can be
created where employee pilfering is discouraged.
The first step is to review every area where potential dishonesty problems
could arise, including:
- inventory control
- data processing
- cash disbursements
The next step would entail setting the mechanisms in place to remove the
temptations that could make an otherwise honest employee dishonest.
In setting up an internal audit system, it's common procedurally for most
companies to divide financial responsibilities and functions so that no one
employee controls all aspects of a transaction. Hence, insurers and consultants
recommend the following:
- Require checks to be countersigned by two responsible officials.
- Limit the endorsement of checks, by anyone other than the owner, to
deposits for credit only.
- Delegate the responsibility for receiving checks and cash to someone other
than the person who records incoming funds.
- Mail statements to outside accounts directly at least monthly.
- Examine payroll records periodically to prevent padding.
- Make sure that employees responsible for ordering goods and supplies are
not the same ones responsible for receiving them or paying for them.
- Do not give the person who has the authority to write off bad debts the
authority to make a credit sale or loan.
- If someone else does payroll, make sure you have access to payroll data on
the computer and that no one changes the passwords or access requirements
for that data.
Dividing financial responsibilities and functions is not enough, though. Take
an inventory of your merchandise at least annually and have an outside public
accountant audit your cash and accounts annually.
Because an employee who never takes a vacation
could be concealing acts of dishonesty, all employees, but
especially the ones who have access to your business records,
should be required to take a vacation annually.