Since the passing of the Sarbanes-Oxley Act of 2002, businesses and corporations have had to reevaluate their financial reporting processes and procedures to comply with more restrictive federal laws. In an effort to protect businesses and organizations against costly errors and fraud, the government is cracking down on financial reporting and the storage of electronic financial documents. Business accounting software can only get you so far. While the software is certainly helpful in tracking and auditing your financial transactions, you need to develop sound internal controls to establish the required “separation of duties” (or “checks and balances system”). Financial responsibilities should be separated within a business or organization, and there should be policies implemented that discourage one person to have complete custody over the financial decision-making and review process.
Setting internal controls ensures compliance with Sarbanes-Oxley and protects the financial integrity of your company or organization. Below are several tips designed to help you set effective internal controls and increase the effectiveness of your financial reporting:
- Do not let the person (or persons) managing your company’s bookkeeping functions handle cash.
- Reconcile bank statements on a monthly (30-day) basis. Make sure this is done by someone who is not responsible for bookkeeping, cashiering, or depositing. When complete, these bank reconciliations should be reviewed by supervisors for accuracy and completeness. Make sure both the reviewer and preparer signs off on each monthly reconciliation so you can track who reviewed it.
- Do not allow employees who handle cash have access to accounting records.
- Reconcile all receipts with deposits made into the company account to verify that all collections are accounted for in the system (and bank). This task should be performed by someone who is not responsible for making the purchases or deposits.
- All cash disbursements need to be approved by an employee who is not involved in the check preparation, bookkeeping or bank reconciliation process.
- Checks need to be written and/or printed by someone who is not responsible for disbursement approvals, check distribution, or maintaining the company’s accounts payable ledger.
- As soon as checks or cash is received, a receipt of payment needs to be prepared; all checks need to be endorsed immediately upon receipt.
- The frequency of the deposits into your company or organization’s bank account should be determined by the volume of funds you receive. If your receipts total more than $500 (or a reasonable amount for your organization), they should to be deposited within a day. For amounts under the threshold, the funds can be properly secured in your office for a week or until the amount reaches the threshold.
- Require two signatures on all checks for cash disbursements, and make sure at least one of the signers is not responsible for any cash receipt or disbursement functions.
- Mark all paid documents (invoices, receipts, purchase orders, etc.) “PAID”, and write the check number and payment date on each document. This will ensure integrity and help you track when you paid what outside of your accounting system.
Setting internal controls is important to your company’s reputation. It can help ensure financial integrity, as well as help you create more effective (and accurate) financial reports. Stay tuned to our blog for more effective financial reporting tips.
Do you need help setting internal controls? Are you looking for ways to improve your accounting processes? Learn more about our accounting services – we’d love to help you get on the right track!