How to Enforce Strong Internal Accounting Controls - dummies

How to Enforce Strong Internal Accounting Controls

By John A. Tracy

Any accounting system worth its salt should establish and vigorously enforce effective internal controls — basically, additional forms and procedures over and above what’s needed strictly to move operations along.

These additional procedures serve to deter and detect errors (honest mistakes) and all forms of dishonesty by employees, customers, suppliers, and even managers themselves. Unfortunately, many businesses pay only lip service to internal controls; they don’t put into place good internal controls, or they don’t seriously enforce their internal controls (they just go through the motions).

Internal controls are like highway truck weigh stations, which make sure that a truck’s load doesn’t exceed the limits and that the truck has a valid plate. You’re just checking that your staff is playing by the rules.

For example, to prevent or minimize shoplifting, most retailers now have video surveillance, as well as tags that set off the alarms if the customer leaves the store with the tag still on the product. Likewise, a business should implement certain procedures and forms to prevent (as much as possible) theft, embezzlement, kickbacks, fraud, and simple mistakes by its own employees and managers.

The Sarbanes-Oxley Act of 2002 applies to public companies that are subject to the federal Securities and Exchange Commission (SEC) jurisdiction. Congress passed this law mainly in response to Enron and other massive financial reporting fraud disasters.

The act, which is implemented through the SEC and the Public Company Accounting Oversight Board (PCAOB), requires that public companies establish and enforce a special module of internal controls over their external financial reporting. Although the law applies only to public companies, some accountants worry that the requirements of the law will have a trickle-down effect on smaller private businesses as well.

Many small-business owners tend to think that they’re immune to embezzlement and fraud by their loyal and trusted employees. These are personal friends, after all. Yet, in fact, many small businesses are hit very hard by fraud and usually can least afford the consequences. Most studies of fraud in small businesses have found that the average loss is well into six figures!

Your business should put checks and balances into place to discourage dishonest practices and to uncover any fraud and theft as soon as possible.