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Salt Lake City Bookkeeping Blog

Why You Need Internal Accounting Controls to Keep Risk at Bay

Posted by Leanne Armstrong on Jul 24, 2019 9:00:00 AM

Why You Need Internal Accounting Controls to Keep Risk at BayHow can you be sure that an employee isn’t secretly stealing from you, that your company is tax-compliant, and that your financial records are reliable? Three words: internal accounting controls.

In fact, establishing and upholding business procedures that prevent fraud and disclose accounting discrepancies is essential for helping you keep risk at bay.

It doesn’t matter whether errors are intentional or accidental, inconsistencies in your accounting records can lead to:

  • Tax audits and penalty fees,
  • Damage to your reputation and financial credibility, and
  • A distorted view of your income and expenses that can result in faulty budgeting, higher tax liability, or reduced valuation of your business

Controlled and trustworthy financial data not only provides the impetus for more profitable business decisions, it keeps little record-keeping mistakes from becoming much bigger problems.

What Are Internal Accounting Controls?

Internal accounting controls are policies you set in place to help manage risk, keep company assets safe, and ensure your financial reporting is accurate.

These processes may be preventative (like limiting file access) or investigative (like performing account audits). But together, they discourage accounting slip-ups while giving you the means to identify and amend mistakes when they happen.

Creating and maintaining a strong framework of accounting-based regulations will also help your business defend itself against internal theft, fraud, and the mishandling of funds.

So let’s take a look at some of the areas where your business can benefit most from establishing a system of internal controls.

Cash and Inventory

Whether it’s sourced from sales, donations, or your petty cash fund, it’s relatively easy for unscrupulous staff to make off with cash money. To discourage opportunity theft, consider:

  • setting up identification codes for all point-of-sale system users,
  • limiting the personnel who handle donations or company cash,
  • keeping cash locked up with an access code that’s frequently changed

To protect company goods, meanwhile, start by enforcing a strict in-and-out record-keeping policy. Then ensure inventory on hand consistently matches your accounting records by conducting regular physical audits in the form of hand-counting.

Accounting Documentation

Does your business have a standardized format and procedure for generating and filing key accounting documents like invoices, receipts, purchase orders, and employee expense reports?

Consistency in documentation management contributes to consistency in record-keeping. It also makes it easier to locate and review company paperwork should you need to track down the source of an accounting discrepancy.

Financial Data Access

Given how easy it is to restrict access to everything from your company’s Google Docs to your Smartphone these days, there’s no excuse for not keeping unauthorized users away from privileged financial data and accounting files.

Take steps to wall off and monitor sensitive data with the help of system lock-outs, passwords, and electronic access logs. You may even be able to have your financial institution restrict your bookkeeper’s bank account access to read-only.

Accounting Duties

Don’t make the mistake of assigning all your company’s accounting tasks to a single employee. Segregation of duties surrounding responsibilities like making bank deposits, keeping records, and receiving goods or payments is critical where internal controls are concerned.

When you share accounting duties among multiple qualified personnel, it reduces the risk that any one employee will be in a position to commit a questionable act.

Assigning specific tasks to specific people is also advantageous any time you need to pinpoint the source of a data entry or transcription error.

Transaction Authorizations

Having policies in place that prevent unauthorized financial transactions will give your business an added layer of security. You may want to make management review and override mandatory for certain dollar values when accepting customer payments or processing company expenses.

To further protect against fraudulent use of company funds, many businesses require two signatures on every check they write. You can take advantage of such a policy with the help of a payment system that allows for electronic signature authorization.

Account Reconciliations

Limiting and authorizing specific transactions is only half the battle when it comes to maintaining control of internal accounts. You’ll also need to audit and reconcile those transactions on a regular basis. 

The beauty of a double-entry accounting system is that it allows you to quickly spot bookkeeping errors. Running a trial balance daily or weekly, meanwhile, will help you trace and address any imbalances you find.

You should also make a point of staying on top of bank account, credit card, supplier, and loan statement reconciliations to ensure your company’s account activity and balances align with those of your financial partners.

Finally, to help your small business establish better internal accounting control, consider taking advantage of cloud-based bookkeeping software like QuickBooks Online.

QuickBooks and other online accounting programs let authorized users securely access, analyze, enter, and approve transactions remotely. They’re also the platform of choice for outsourced bookkeeping professionals who understand the significance of safeguarding your business financials.

 

Photo Credit: Canva

Topics: Financial Reporting, Bookkeeping Theft