Published March 14, 2013

Internal Controls Provide Effective Management Tools for Successful Businesses

A worldwide survey by the Association of Certified Fraud Examiners ( ACFE ) found organizations with fewer than 100 employees significantly trail their larger counterparts in the implementation of formal antifraud controls. The percentage of small organizations that have formal controls in place is just so dwarfed by the large organizations, said ACFE s Director of Research Andi McNeal, CPA. And we noticed a real opportunity for small organizations to invest in simple measures, even a code of conduct, which frankly shouldn t cost more than a handful of hours of employees time.

Internal controls are designed to safeguard assets, ensure effective and efficient operations, produce reliable financial reporting, and ensure compliance with applicable financial and operational laws and regulations. Management s overall attitude to internal controls and their importance in the business creates an environment or culture within the business itself. Employees become aware of the environment through words and actions. This tone-at-the-top awareness often starts with the vision and values of the business and the actions of the owners.

Control activities are policies and procedures that management uses to achieve the overall objective of the business. Procedures explain the how, why, what, where, and when for any set of actions. Some small business owners may think procedures are unnecessary. Nevertheless, written procedures help train new staff by explaining why they need to do what is asked of them. Written procedures also reduce errors and help employees understand the business and their job responsibilities more quickly, reducing the time needed to train new staff. The most important control activities involve segregation of duties, proper authorization of transactions and activities, adequate documents and records, physical control over assets and records, and independent checks on performance.

  • Segregation of duties requires that different individuals be assigned responsibility for different elements of related business activities, particularly those involving authorization, custody, or recordkeeping. Segregation of duties creates an internal system of checks and balances within the framework of your business.
  • Proper authorization of transactions and activities helps ensure that all company activities adhere to established guidelines unless responsible managers authorize another course of action.
  • Adequate documents and records provide evidence that financial statements are accurate. Controls designed to ensure adequate recordkeeping include the creation of invoices and other documents that are easy to use and sufficiently informative; the use of pre-numbered, consecutive documents; and the timely preparation of documents.
  • Physical control over assets and records helps protect the company’s assets. These control activities may include electronic or mechanical controls (e.g., a safe, employee ID cards, fences, cash registers, fireproof files, and locks) or computer-related controls dealing with access privileges or established backup and recovery procedures.
  • Independent performance checks, which are carried out by employees who did not do the work being checked, help ensure the reliability of accounting information and the efficiency of operations.

Failing to design, implement, and monitor an effective system of internal controls often lead to negative consequences that are not tolerable for most small businesses. A well-planned, functioning system of internal controls is more than a compliance vehicle for small businesses; instead, it is an effective management tool that contributes to the success of the business organization.

For more information about how PYA can assist your organization with assessing business risks and control processes, contact the experts listed below at (800) 270-9629.

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