Protect Your Business and Your Employees with Internal Controls

By Jane Johnson, MBA, COO | Christy Boss

March 21, 2024

At GC, our focus is proactive problem-solving, strategic planning, and efficiency to drive heightened profitability. Too often, businesses encounter issues only after they’ve already unfolded, underscoring the critical importance of revisiting the timeless topic of internal controls. Fortify your defenses to safeguard your operations against the risks of theft, fraud, and mismanagement.

Internal controls are processes and records that ensure the integrity of financial and accounting information and help prevent fraud. Simply put, internal controls are checks and balances that ensure accurate information is available for management decisions. Creating standardized management procedures reveals errors and omissions and discourages employee theft.

So, How Do Internal Controls Help?

Internal controls serve as an initial defense against fraud and can also help promptly detect fraudulent activities, thus minimizing losses. Here are some critical internal controls to keep in mind.

Key Internal Controls:

  1. Policies and Procedures: Clearly documented and enforced guidelines outlining internal controls and delineating responsibilities are crucial for establishing safeguards and ensuring accountability among employees and management.
  2. Authorizations and Approvals: Policies should specify individual authority levels for transactions and delineate approval procedures. Requiring multiple approvals helps scrutinize transactions and reduce errors and fraud risks.
  3. Segregation of Duties: Implementing a system of checks and balances where no single individual controls all aspects of a transaction is vital for fraud prevention. Regular evaluation of employee duties ensures proper segregation of responsibilities. Remember that trust is not the issue; the point is to ensure no single person has unquestioned authority to manage your finances.
  4. Safeguarding Assets: Limiting access to assets and inventory records to authorized personnel and implementing dual control for certain assets helps prevent misuse and safeguard organizational resources.
  5. Reconciliation and Review: Regular data comparison and record review can help identify anomalies and discrepancies. Investigating discrepancies and refining processes can deter future deviations. Bank reconciliations can spotlight discrepancies, but only if they are reconciled on a timely basis. Reconciliations should be prepared once a month, and any adjustments should be tracked carefully from one month to another.
  6. Internal Audits: Internal audits serve as preventive and detective measures against fraud. Identifying areas of fraud risk and recommending enhanced controls are essential functions of internal audits.
  7. Data Analytics: Leveraging technology to analyze data for detecting unusual patterns and anomalies aids in proactive fraud detection, potentially minimizing losses.
  8. Anonymous Reporting: Establish a mechanism for employees to confidentially report problems and suspicious activities. This is a low-cost way to bolster fraud detection and prevention.

With the knowledge of internal controls, consider scenarios where trouble might be prevented. Could any of these ever happen in your business?

Unchecked Check Drawer:

  • Issue: An employee failed to promptly deposit checks, resulting in an accumulation of undeposited funds, posing potential financial loss.
  • Solution: Implement a system where received checks are recorded immediately, deposited by a separate individual, and daily receipts are reconciled with deposits to ensure timely banking.

Forgery Alert:

  • Issue: Lack of security over check copies enabled an employee to forge signatures and manipulate bank statements without detection.
  • Solution: Secure checks and sensitive documents, granting access only to authorized personnel. The business owner should review bank statements periodically to detect irregularities.

PO Box Deception:

  • Issue: An employee abused the authority of the Accounts Payable role, creating fictitious vendors and diverting payments to a personal PO Box.
  • Solution: Assign different individuals to manage vendor lists and approve payments. Regularly scrutinize new additions to vendor/customer lists, cross-checking addresses for discrepancies.

Misleading Gas Receipts:

  • Issue: A company had an account with a local gas station. At the end of each month, they were given a stack of receipts with an adding machine tape reflecting the total amount due for the gas account. Inflated totals on gas receipts led to erroneous payments uncovered during an audit.
  • Solution: Always verify supporting document math to ensure accuracy and prevent financial discrepancies.

Fraud has become a constant threat for business owners and individuals alike. Reviewing the suggestions provided can be a good first step toward controlling fraud. You can review your internal control systems using this checklist.

Grimbleby Coleman can provide trusted recommendations, technology, and tools that do some of the work for you. For an assessment of your operation’s internal controls, reach out to our team.