As we discussed last week, establishing and maintaining strong internal controls is important for any business or non-profit organization. In order to effectively reduce the risk of fraud and internal theft, you need to implement internal controls in every area of your organization, including management and your accounting system. In this article, we’ll be discussing key internal controls your business and non-profit organization should consider implementing on each level, as well as highlight some important methods of strengthening security throughout your entire organization.
Internal Controls on a Management Level
While accounting and financial management may not be your area of expertise, you still need to play an active role in the process. Having a clear understanding of the accounting process and what is occurring with your finances is always a smart idea. Too often we hear of business managers and non-profit leaders putting too much trust in their employees and taking a hands-off approach to bookkeeping. While it’s good to trust your staff, you can never be too trusting (as recent fraud statistics have shown). By taking the following simple steps, you can reduce the risk of fraud and create a culture of responsibility among your management team:
- Take an interest in the books. Make it a point to review financial reports periodically and ask questions about any discrepancies you may see. If you don’t understand financial reports or need help identifying key figures, seek the help of a certified public accountant. They can train you on everything you need to know about creating and reading these reports, as well as help you understand how this information impacts the everyday operations of your business or organization.
- Create an ethics policy. If you want to set your employees up for success, make sure they have a clear understanding of what you will and will not tolerate as an organization. Create a written policy that outlines your policy for ethics and business integrity and ensure that all of your employees sign it. Perform an annual review of this policy to adjust for changes in the work environment.
- Check in on your employees regularly. The most successful business managers and non-profit leaders have established a clear presence among their teams. Employees who know they are being constantly checked in on are less likely to engage in fraud and theft. By establishing a culture of oversight and review, you are protecting your business or organization from substantial losses.
- Perform random reviews of important reports and financial documents. While it’s always a good idea to review financial reports on a monthly basis, management should also choose other reports to spot check. Since your employees won’t be able to predict what you’re looking at, you will have a more honest assessment and be able to identify fraud quickly and easily.
Internal Controls in Your Accounting System
Limiting who has access to your accounting system is the first step you should take when implementing internal controls in the accounting process. Many software systems will even allow you to limit users’ access to certain areas of the system so you can more effectively manage who has full access to your financial information. Assign software rights according to each employee’s responsibilities. For example, if a particular employee is in charge of Accounts Payable, they should not have access to Accounts Receivable or be able to balance the bank statement. Clearly defined roles protects your assets and encourages accountability among your staff.
Here are a few more internal controls to consider implementing:
- Perform regular backups of your financial accounting database
- Hire an outside CPA to review your books on a periodic basis
- Set up an audit trail in your accounting software system
- Password protect all financially-sensitive documents
- Create a separate sign-on for each user of the system
Internal Controls for Financial Management
Protecting your finances should be your number one priority as a business or non-profit. Keep these methods of strengthening your financial security in mind as you reevaluate your current internal controls:
- Create a deposit slip for any cash or checks that come through the door. This could include creating a separate log for all cash and check receipts that is then passed on to the bookkeeper and business owner. Once deposits have been made, the owner can then compare the receipts log to the bank deposits.
- Create an approved vendor list and a vendor approval policy. Each vendor must be approved prior to any business being done with that vendor.
- Check preparers should be different than the people signing the checks.
- Consider having two people sign all checks over a certain threshold.
- Avoid issuing emergency checks whenever possible.
- Create a policy for submitting employee reimbursements and make sure all employees follow the same policy.
- Require receipts for all credit and debit transactions.
- Maintain separate cards for different users for accountability.
- Reconcile bank accounts and credit card statements monthly.
- Monitor online banking activity on a monthly basis.
- Require documentation for any payroll changes.
- Implement a timesheet approval process before payroll can be completed.
If your business managers or non-profit leaders are not committed to following through on established internal controls, your employees won’t be either. Your management team should be setting an example for the whole organization to follow. For additional methods of strengthening your business and non-profit security, give us a call today. Our certified public accountants would be more than happy to perform a financial management review and help you create more effective accounting processes and stronger internal controls.