By Paul Soler, Partner, Citrin Cooperman
Running a business is challenging and takes a significant amount of time and dedication. For most owners, their time is spent cultivating business relationships, managing their employees, developing new products, and tackling the seemingly endless amount of daily administrative tasks. The time spent on these areas is critical to remain competitive and profitable. With all these daily activities, establishing a system of strong internal controls often gets overlooked.
This is especially true for businesses that do not have large accounting departments. In these situations, there is often a belief that internal controls cannot be created because there are only a few people maintaining the company’s accounting system. However, as we will discuss below, there are many controls that can be established without hiring additional employees.
With limited resources and time, the first and most important area to focus on establishing is cash controls, as cash is most susceptible to theft. Owners need to recognize that most fraud is committed by one of their employees. Too often, owners let a favorable opinion of their employees cloud their skepticism. You’ll hear comments such as, “I have the utmost trust in John” or “Jane is the nicest person I know, she would never steal.” And yet, when fraud occurs, the perpetrator is almost always the last person you would expect.
The first step in this process is putting aside any opinion of how nice or trustworthy an employee appears to be. You never know what financial issues your employees are going through or what other factors are in their lives that would cause them to rationalize stealing. Even if your current employees would not steal, turnover happens, and the next employee might not be as honorable.
Some considerations when developing internal controls to safeguard cash include:
- Positive Pay: This is a program offered by many banks, where the check runs are communicated to the bank and the checks are only paid if they match the information provided. Mismatches are flagged and would require approval by the company to be paid.
- Segregations of Duties: Avoid having one person handle every part of cash transactions. If your accounting department is small, consider involving administrative employees in the process. Examples include:
- Someone independent of the cash deposit function creates a list of all checks received, which can be reviewed and compared to what was actually deposited.
- Outgoing checks are mailed by someone different than the employee who created the check run.
- Someone different than the employee who created the check run reviews the checks and the related invoices.
- Bank Reconciliations: These need to be performed shortly after every month end, ideally by someone who is not responsible for recording cash transactions in the accounting system. If this segregation is not possible, the bank reconciliation should be reviewed by an owner.
- Check Signors: Review the list of check signors annually to ensure that they are appropriate and only include active employees.
- Periodic Review of Bank Statements: As an owner, a great control to have in place is to periodically review the bank statements and ask questions about transactions in the statement. This lets your employees know that you are carefully monitoring cash transactions.
Fraud is often committed when an employee creates a fraudulent vendor in the accounting system. This can be prevented by limiting who can create new vendors. Regularly review existing vendors, review for duplicate vendor names, enhance the new vendor approval process, and review year over year disbursements amounts to vendors for reasonableness.
The above controls are far from being all inclusive, but they are easy and practical steps. For more information on how to safeguard your business, contact Paul Soler.
“Citrin Cooperman” is the brand name under which Citrin Cooperman Advisors LLC and Citrin Cooperman & Company, LLP, independently owned entities, provide professional services in an alternative practice structure in accordance with applicable professional standards.
