CHARLESTON -- Internal controls are the methods and procedures designed by management to safeguard assets and to manage resources.
A system of internal controls serves to minimize errors in accounting records, as well as to detect fraud, embezzlement and theft by employees, customers and vendors. An effective system of internal control promotes efficiency, reduces risk of asset loss and helps ensure the reliability of financial statements and compliance with laws and regulations.
Most internal controls can be classified as preventive or detective.
Preventive controls are designed to discourage errors or irregularities. For example:
* A computer application prevents the entry of an invalid account number.
* A manager review of purchases prior to approval prevents inappropriate expenditures.
Detective controls are designed to identify an error or irregularity after it has occurred. For example:
* An exception report detects and lists incorrect or invalid entries or transactions.
* The manager's review of long distance telephone charges will detect improper or personal calls that should not have been charged to the account.
The following are important components of an internal control system:
Segregation of duties: Related duties should be assigned to different people whenever possible. Whenever one or two employees perform most of the accounting functions, actively supervise the employees and spot check accounting records.
Bank reconciliations: Receive bank statements unopened and scrutinize for unusual activity. Review reconciliations prepared by employees, particularly the list of reconciling items. It is also very important to review any transfers between bank accounts.
Safeguard of valuable assets: It is very important for a business to have strict control over blank checks, maintain accurate inventory records, and make daily deposits of checks and cash. Businesses should also restrict access to sensitive customer information and change computer passwords regularly, particularly after terminating someone's employment.
Review appropriateness of payments: It is critical for businesses to restrict signature authority on company bank accounts and other financial accounts. It is also important to compare payroll checks with current employee records and verify the account numbers when signing any checks made payable to a credit card company.
Place emphasis on accounting: In 25 years of accounting practice, I am extremely fortunate to have known of only three clients who were embezzled. Each time the culprit was caught by us, the accountants, by reading and analyzing timely, consistent and accurate financial statements and spotting the deviations.
Tip of the day: The Governor's Guaranteed Work Force Program gives small businesses a competitive edge by providing access to quality workforce training. GGWF reimburses pre-approved technology, technical and regulatory compliance training for small businesses up to 75% of the actual training costs, to a maximum of $5,000.
Nistendirk is a partner at Woomer, Nistendirk & Associates PLLC, a CPA firm located in Charleston. Bob has extensive experience in tax accounting, strategic planning and financial/business consulting. He can be contacted at email@example.com.