John Brian Fast, CPA

Small businesses usually have more internal controls risks because they have fewer employees and may not have the safe separation of duties that large companies enforce. 

Here are come critical internal controls that all businesses should have:

Miss Speedy Spells It Out: Often it is the most trusted employee who is stealing from you. As Horatio Caine in CBS's series CSI: Miami often says, “Trust, but verify!”

 1.      A separation of the duties of the receipt of cash and the recording of sales and receivables is very important.  One of the most common frauds is that the same person who collects cash maintains the accounts receivable ledger and covers up embezzlement by manipulating the sales or receivable records.  The cash receipts function is one area that the office manager should check frequently.  If an employee knows that this function is closely monitored he or she is less likely to attempt a defalcation.

 2.      Know where your company’s equipment is and who is responsible for custody.  Employees should be accountable for the equipment they control.  The maintenance of a company’s fixed asset records is often neglected, leading to the theft and loss of valuable equipment.  It is particularly important to monitor laptops since they are portable and easily sold or pawned.

 3.      The purchasing function is another high-risk area.  An employee who makes purchases from third party vendors may be tempted to favor one supplier because of gifts or kickbacks given to that employee.  A publicized and documented bidding process may be time consuming, but the stronger and more far ranging the bidding process is, the less likely the cost of purchases will be inflated by fraud.

 4.      Intentional and inadvertent double payments to vendors do occur.  There are specialists that have a thriving business uncovering duplicate payments made by companies to their suppliers.  Simple automated searches made of the disbursement records can easily uncover such duplicate payments.  Preventative controls can also be installed in the disbursements systems that make duplicate payments less likely.

5.      The pilfering of inventory stocks causes billions of dollars of losses to the country’s wholesalers and retailers each year.  Surprisingly, employees make a large percentage of these thefts.  Security cameras, exit checks of employees and customers, and the use of RFID chips and other security devices have helped to reduce these losses.   Check, check, check.  The best preventative environment is for your employees and customers to think that they will be caught and prosecuted if they attempt to steal from you.

Big Brother may help Mom and Pop prevent thefts.

 6.      Do you have employees that are paid by the hour?  The best way to accurately measure your employees’ actual hours is a good time clock.  There are good automated systems that tie into your payroll processes.  Of course, this does not stop another employee clocking in or out for another employee.  If this is a problem for your business, you might want to consider a security camera that covers your time clock.

 Recommendation:  In a small business, the most effective control is obtained by the direct observation and supervision by the owner or manager.  Do not let distractions or inertia deter you from a regular review of the controls over your critical assets.  In a mom and pop operation, no one watches the store better than mom and pop.

This is an update of a post previously published on August 17, 2009.