You read this in every town newspaper throughout the country: A small business owner puts their trust in a bookkeeper who embezzles thousands of dollars. Even if the proprietor is not forced to leave the business, theft is definitely a major burden.
We hear about these occurrences so often since small businesses may only have the owner and a bookkeeper. Because the owner dislikes and doesn’t comprehend doing the books, they rely on this one person to manage everything.
In order to pay back the bookkeeper, who usually has personal financial difficulties, a little sum of money is seized. Since no one seems to notice, more are taken. Over time, it accumulates to a substantial amount of money.
This is when the concept of “internal control” comes into play. To put it simply, every company should have some sort of internal control system in place to protect against intentional and inadvertent losses. This is because “internal control” systems will: 1) protect funds and other assets; 2) promote the effectiveness of transaction processing; and 3) ensure that financial records are accurate.
The primary elements of an internal control system are policies and procedures designed to provide a reasonable degree of assurance that these three objectives will be fulfilled. The size and complexity of the business will determine the internal control system’s scope.
One of the most important elements of any internal control system, regardless of scale, is the concept of role separation. When duties are divided, it is more difficult for errors and theft to go undetected. It is very rare to find two employees “colluding” to steal from the business.
I worked as an internal auditor for a chain of newspapers for three years. I was in charge of breaking into the newspaper offices, going directly to the cash boxes, counting them, and looking over the receipts. One of my most important audit responsibilities was confirming the presence and efficacy of internal control mechanisms. Some suggestions for internal control procedures related to cash management are as follows:
Money should only be handled by specific designated individuals.
Assign bookkeeping responsibilities to a non-financial person.
Numbered receipts should be used to document every payment.
It is important to make all bank deposits on schedule.
The person who does the bank reconciliation should not be the same person who handles cash.
If at all possible, the person who makes the bank deposit should not be the same person who handles the cash and prepares the bank reconciliation.
Verify that your deposits have not changed and that no funds have been removed to pay for expenses.
Keep your cash and checkbook in a secure drawer or cash register.
Establish a tolerance level for shortages and overages to determine when corrective action will be required because tills are never entirely accurate.
Except for modest amounts paid using petty cash, all payments should be made by check.
Make sure every payment is associated with a paper document, such as a voucher, to ensure that there is a paper trail for every transaction.
Conduct surprise, ad hoc counts of petty cash and cash drawers.
Count assets and inventories on a regular basis, then compare the results to the company’s financial records.
Early implementation of an internal control system as a preventative measure is more effective than establishing one in reaction to a loss. If your small business is just you and the bookkeeper, you should learn how to do some of the bookkeeping tasks so that you can spot-check the bookkeeper’s work. In and of itself, that’s a fantastic preventive measure.