Internal controls are best defined as the policies and procedures an organization employs to create value and minimize fraud risk. They are critical not only for fraud prevention but also for accurate financial reporting. For these reasons, business owners must be careful to avoid complacency. Even if your controls seem to be sound, there’s always room for improvement.
Here are four ways to improve your internal controls:
Better segregation of duties.
This is a big one, and it’s an easy place to start. Segregating duties allows for double verification. In other words, it prevents a scenario where an employee has unchecked authority. Every process should have at least one review. For instance, if your bookkeeper cuts the accounts payable checks, you (as the owner) or another trusted partner should verify each check for accuracy. With this double verification in place, you have a better chance of catching things such as payment to unapproved vendors, double billing, or unauthorized billing rates. Also, think about the people who currently perform controls—is this still the best use of their time?
Review software privileges.
As more and more processes become electronic, controls over your software platforms are becoming increasingly important. Consider who has access to what modules. As employee roles change, should their software access follow suit?
Revisit inventory counts and pricing.
As your company grows, the frequency at which you count inventory may need to increase. For example, an annual count may have been appropriate when revenues were at $500,000, but now that they’ve doubled you may need spot checks throughout the year. In addition to the frequency of counts, think about pricing: Who’s approving the price of inventory? Should this role change?
Conduct a fixed asset review.
Controls over fixed assets such as vehicles can be easily overlooked. A review or inventory of fixed assets can verify their existence and also serve as a way to strategize maintenance and/or replacement.
Start off the new year with the right fraud controls in place.
Taking steps to improve your internal controls now sets you up for a strong start in the year ahead. This is particularly important if you are looking to sell, transfer ownership, or bring in investors. Prospective buyers and investors will want to see internal controls, as they indicate a business in good standing. You can also expect your internal controls to be scrutinized during an annual audit.
If you’re unsure of how to improve your company’s internal controls, talk to your JAK accountant. We often help clients with designing and improving their controls, and are happy to help you strengthen yours.