Enhancing Business Integrity: The Crucial Role of Internal Control

Enhancing Business Integrity: The Crucial Role of Internal Control

It’s a familiar narrative in papers around the country, from towns to cities: a long-time bookkeeper steals from a small business and the owner loses thousands. While the fraud doesn’t necessarily put the business under, it does cause the owner a big headache.

They are more than a cliché because, in a small business, personnel might consist of the owner and a bookkeeper and it’s likely that the owner, often a non-accounting person, will fully entrust financial matters to this one individual. In many instances, in the course of handling various financial duties for the business, the bookkeeper is in desperate need of money and first nets a small sum ‘for himself’ with a promise to himself to return it later. No alarms are sounded so the amount is doubled and slid off into their own pocket later. The pat on the back from the business owner makes it possible to steal a little more, and a little more, until the shortage becomes huge.

This is where we see the statement of ‘internal control’ show up as part of the framework. Every business, large or small, needs to have a system of internal control set up to prevent losses – whether intentional or unintentional – to the organisation. The purpose of an internal control system would be to: 1) limit the risk of loss of assets, including cash; 2) improve the processes for transactional processing; and 3) provide accurate and complete financial records. The attainment of these objectives depend on having in place policies and procedures that provide ‘reasonable assurance’ that the above will be achieved. The extent or scope of the internal control system relates to the size and complexity of the organisation.

Regardless of scale, one of the most important features of an internal control system is ‘segregation of duties’. This helps to reduce the probability that theft and error will go undetected. Two employees colluding to steal company funds is a rare occurrence.

When I was an internal auditor for a newspaper chain, I went around and did surprise audits, checking cash on hand and receipts. Internal controls are a basic part of my job. The following are some internal control procedures regarding the handling of cash:

  • Assign cash handling responsibilities to specific authorized individuals.
  • Entrust bookkeeping duties to an individual who does not handle cash.
  • Utilize numbered receipts to document all payments.
  • Expedite bank deposits promptly.
  • Assign different individuals to prepare the bank reconciliation and handle cash.
  • If feasible, designate different individuals for bank deposits, cash handling, and bank reconciliation.
  • Conduct deposits without any withdrawals for expenses.
  • Safeguard cash and checkbooks in locked drawers or cash registers.
  • Establish a tolerance threshold for overages and shortages in tills to trigger corrective measures.
  • Execute disbursements via checks, barring minimal amounts disbursed from petty cash.
  • Make sure every payment is for a receipt – a voucher, for example – so that it has a paper trail for disbursements.
  • Regularly conduct random surprise counts of petty cash and cash drawers.
  • Frequently count inventory and assets, comparing them with company records.

Controlling the potential for the loss by establishing an internal control system is far easier to do proactively than it is to formulate a corrective one after something went wrong and was lost. If your small enterprise consists of you and a bookkeeper, learn to do some bookkeeping yourself so that you can periodically check in with the bookkeeper – an ounce of prevention that is worth a ton of cure. Internal control is a path, just as much as it is a matter of policy. It protects the financial integrity of your business and helps contribute to its broad success.

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Questions and Answers:

What is the role of internal control in a business?

Without proper internal control, a business would be exposed to risk: people might steal assets from the company, an accountant might accidentally misreport the balance sheet, or a sales clerk might deliberately under-report sales to minimize their taxes.

Why is internal control important?

Simultaneously, internal control is the key to preserve the quality of entire and continuous financial operations of an enterprise, as it prevents losses, provides legal security, improves operational efficiency and enhances the confidence of stakeholders.

How does internal control prevent fraud and errors?

Internal control builds barriers to fraud and errors through segregation of duties, authorization controls, and monitoring.

What is the concept of separation of duties in internal control?

Separation of duties refers to making sure two or more different functions of a transaction are performed by different individuals. Essentially, it creates factions of people watching out for each other, which helps to prevent sale transactions from becoming a series of unchecked actions that can open up for fraud or miscalculation.

How can internal control enhance financial reporting accuracy?

Internal control ensures that financial transactions are tracked accurately and consistently, generating financial reports that can be relied on. Examples of internal control include the regular double-checking of internal accounting records, routinely reconciling bank statements to check for exceptions, ensuring that the business’s financial records comply with accounting standards, and more.