Even when you think you have internal controls that’ll uncover a nickel that falls under a desk, it’s important to revisit them – and their effectiveness – periodically. It’s remarkable how many business owners or chief financial officers operate with a certainty that their accounting safeguards are keeping them safe, but they are actually failing.
Effective internal controls are important for all businesses, regardless of size.
Major corporations have extensive and expensive accounting systems and procedures to catch anything out of the ordinary. Except, not, as the examples below illustrate. Please note the positions and responsibilities of the individuals who either actually, or allegedly, committed the fraud:
From the U.S. Attorney’s Office, Southern District of Houston:
“An accountant from Georgia has admitted he committed wire fraud and stole more than $3 million from Houston company Airis International Holdings, announced U.S. Attorney Kenneth Magidson. Daniel Nathan West, 50, of Duluth, Georgia, was previously employed as the treasurer and chief financial officer for Airis International Holdings. In this role, he was to manage Airis finances during construction projects, control the company’s monetary assets, administer payments and payroll, among other things.”
From KCTV-5 News, Overland Park accountant embezzled more than $4 million:
“An Overland Park accountant has admitted he embezzled more than $4 million from his firm’s clients. Thomas Hauk, 42, pleaded guilty to five counts of bank fraud, two counts of wire fraud, five counts of counterfeit securities and four counts of money laundering. Hauk worked as accountant at Assured Management Company from approximately 2005 to July 2015.”
From Reuters, Ex-Gottex accountant charged in U.S. with embezzling $3.4 million:
“A former accountant for Gottex Fund Management Holdings Ltd has been criminally charged with embezzling nearly $3.4 million over a four-year period from the Swiss hedge fund firm. Gary Tiffany, 32, was arrested on Monday and charged in a criminal complaint filed in a federal court in Boston with bank fraud, wire fraud and engaging in illegal monetary transactions, prosecutors said…According the complaint, from April 2011 through November 2015, Tiffany wired funds from the company's accounts to his own and forged checks in order to embezzle $3.38 million.”
The internal controls imperative exists regardless of the size of your business or the length of time employees have been working for the company. The companies listed above lost millions. On a relative scale, a small business can be hit just as hard, or harder, with the loss of far smaller sums.
Here are ways to conduct a checkup:
- If you’re internal controls policies are not in writing, write them down; if you have no written policies, you effectively have no internal controls.
Written policies give consistency to your office operations, eliminate confusion about proper procedures; benchmarks through which to ensure activities are being properly conducted; and protect the business if a claim is made by an employee that he or she didn’t understand what was expected of them or claims to have been told “this is how we do that” though it doesn’t conform with policy.
- Segregate duties.
Ensure one person doesn’t have unilateral authority with respect to how money is received, disbursed, or accounted for. The more an individual believes themselves to be in sole possession of authority or accountability, the greater the temptation for its misuse.
Also, employees who prepare deposits should not make the deposits. Staff that reconciles accounts should not be solely responsible for preparing financial statements. Accounts payable and receivable functions should have more than one person involved in each process, with periodic random reviews conducted by senior management or the business owner.
There should be segregation of duties and redundancy of accountability in every aspect of receiving or disbursing money.
- Document every financial activity – including petty cash withdrawals.
- Use qualified professionals to find the gaps in your systems and strengthen the ones that are working well.
If you’d like to learn more about internal controls, the AICPA, ACFE and COSO all have great resources. You can always check with your CPA, too.
Remember, good internal controls are like a continuous MRI exam: it enables you and your accounting team to know what’s going on internally to ensure your systems are healthy and able to react to problems or fraud before they become crisis.
MORE FROM RODEFER MOSS YOU MAY LIKE:
- Lacking effective internal controls? Prepare for external grief
- Records retention: what you need to know
- Fraud prevention this tax season