Internal Controls Guidelines for Small Businesses
The lament of many small business owners/managers is, “We’re too small for internal controls.” But even a relatively small business can enforce certain internal controls that are very effective. Here are basic guidelines for small business owners/managers:
Sign all checks: The owner/manager should sign all checks, including payroll checks. This precaution forces the owner/manager to keep a close watch on the expenditures of the business. Under no conditions should the accountant, bookkeeper, or controller (chief accountant) of the business be given check-signing authority. These people can easily conceal fraud if they have both check-writing authority and access to the accounting records.
Mandate vacations: The owner/manager should require that employees working in the high-risk areas (generally cash receipts and disbursements, receivables, and inventory) take vacations of two weeks or more and, furthermore, make sure that another employee carries out their duties while they’re on vacation.
To conceal many types of fraud, the guilty employee needs to maintain sole control and access over the accounts and other paperwork used in carrying out the fraud. Another person who fills in for the employee on vacation may spot something suspicious.
Get two sets of eyes on things: Although segregation of duties may not be practical, owners/managers should consider implementing job sharing in which two or more employees are regularly assigned to one area of the business on alternate weeks or some other schedule. With this arrangement, the employees may notice if the other is committing fraud.
Watch out for questionable spending: Without violating their privacy, owners/managers should keep watch on the lifestyles of employees. If the bookkeeper buys a new Mercedes every year and frequently is off to Las Vegas, you may ask where the money is coming from. The owners/managers know the employees’ salaries, so they can make a judgment on what level of lifestyle the employee can afford.