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As a business owner, you are obviously concerned with protecting all of your company assets; from inventory to fixed assets to cash.  There are several safeguards that you can put into place that will help protect you from loss of these assets either through intentional efforts of employees or through human error.  Internal control procedures are the best defense against embezzlement, fraud or theft.  But they also help reduce and help identify unintentional errors made by trusted employees.  This is a much more involved topic that can be entirely covered in this post, but an understanding of the basics will help  you determine where you need to improve or develop procedures that safeguard your assets..

Segregation of Duties is a basic form of internal control.  This basically means that you divide duties between yourself and employees so that no singular employee cannot affect every stage of a process involving company assets.  When you have an employee that inputs the payable invoices, selects them for payment, signs the checks and reconciles the bank account, this employee can easily create bogus vendor invoices, write checks to themselves or others and hide it from you.

Not every business has enough employees to properly segregate financial duties.  Here are some basic controls and procedures which can reduce the possibility of theft.

Cash:  1) Put a procedure in place that requires two signatures on checks in excess of a certain amount.  If two people need to sign checks, it is more difficult for one person to write a check for bogus purposes. 2) Reconcile your bank statement.  It is important for you to see what transactions are being run through your bank statement.  Both the physical checks and deposits, but also the electronic and automatic payments that we all find so convenient these days.  3) Monitor your Accounts Receivable and start calling when accounts start to age.  The more contact you have with accounts that are late paying, the better your chances are of getting paid and getting paid faster. 4) Keep your check stock secured. Look for missing check numbers in your accounting software and then see if the missing checks have, in fact, been cashed but not recorded properly. 5) Always have someone who is not in charge of writing checks or making deposits reconcile the bank statement. This gives you a better chance of identifying something that does not look right.  Their questions should be brought to you first so that you know of the issue and can determine if the answer provided is valid

Accounts Payable: 1) If one employee prepares vendor invoice payments, have yourself or another employee be in charge of signing the checks. Prepared checks should come with the original invoice attached so they are easily reviewed by the signing party.  Each check must be matched with a valid and original invoice from a recognized vendor for a service or product that you know you purchased.  Paying from photocopies can enable paying an invoice twice or having a second payment be a theft by an employee. 3)  Not all vendors are great about volunteering that you made a duplicate payment or a payment in excess of what you owed.  They keep your money for a while and when you do not contact them about it, they keep it.

Accounts Receivable:  1) Have someone other than the person in charge of accounts receivable open the mail and copy all checks received.  All original checks should be stamped “For Deposit Only” with your company name and account number below it and deposited immediately.  You can order custom stamps with this information on them to make that process very easy.  The photocopies can then be used to post the payments to the customers accounts.  Better yet, use a lock box account with your bank so all checks are sent directly to the bank and deposited.  You then get a report from the bank on what was received and by whom.  That report is then used to post to  your accounting software.  2) Maintain control in your software over which employees can create Credit Memos.  You are trying to avoid a scenario whereby an employee can cash a customer’s check and then create a credit memo that makes the original invoice disappear from the Accounts Receivable aging report.  You should review all credit memos that need to be created if you do not have enough employees to assign this task to a second employee.  Periodically fun a report of all credit memos created and review them for validity.  3) Watch your receivable aging.  Have someone call on accounts that are past due.  This will help your cash flow and will alert you to accounts that show as past due, but in fact have been paid and the money was diverted somewhere else.

General Procedures:
  1) Limit employees’ ability to delete or void transactions.  If you use QuickBooks, you can select the specific duties each employee has access to and this can include voiding and deleting.  This  will reduce their ability to pay an invoice with a phony check and then delete the invoice and the check from the system. 2) Remember that the “Audit Trail” in QuickBooks will show you every transaction that has been created, changed, deleted or voided.  This feature cannot be turned off in QuickBooks, so it is a good tool to use when you are trying to recreate what happened to a transaction and determine which user affected the change and the date and time of the change.  You can filter the report for a specific time frame or a specific type of transaction to narrow down the transactions it show.

Someone who is of a mind and familiar enough with your systems can always find a way to steal from you.  If you don’t have enough people to spread the duties amongst, you need to have your hands in some portion of it often enough to reduce your risk.  Just having systems in place helps reduce the ability of an employee to look for a way to steal from you.  The appearance of good internal controls makes an employee reconsider trying to steal from you.

Fraud can be very difficult to find, especially if two or more people collaborate.  Be very wary of someone who never uses their vacation time.  Vacations are when their duties might be given to someone else to do and thus they might be caught.  Have your employees cross-trained so that you can switch them back and forth periodically to reduce your risk that one employee always handles the same processes.

Human error causes a lot of financial loss
.  Without proper procedures in place, invoices can be paid twice and you may never be made aware of the duplication.  Erroneous transactions can hit your bank account.  Banks are not error-proof.  You need to catch these errors by reconciling your bank accounts and credit card transactions.  These procedures should be put into place to catch errors first of all and to protect you from intentional theft as well.  Look at your internal processes and see where one person controls a process from beginning to end.  That is where you should start to develop better internal control.

This is a serious issue.  If you do not feel you understand the areas where you have risk, ask your accountant to review them with you.  Many safeguards are easy to implement and cost nothing at all, but are worth their weight in gold.  An initial investment in the review and development of your procedures and processes is worth it, not only from developing good internal controls that your business can easily put in place, but you will find that an experienced professional can improve your processes and make them more efficient and effective; saving you time and money in the immediate future and going forward.  A cost savings in itself….

Post Author: Tricia O'Connor CPA MBA

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