Internal Controls for Small Businesses

1
Internal Controls for Small Businesses

• Bryce Birdsong, CPA, CFE
• Glass Company, Certified Public Accountants
• Austin, TX

2
Why focus on internal controls?

• Owners need accurate information to run a
  business
• Garbage in Garbage out
• A strong system of I/C reduces errors in
  financial data
• Establishes the proper Tone at the Top
• A strong system of internal controls is your best
  defense against occupational frauds
• Internal controls can (and should) be implemented
  in all organizations, regardless of size
• Extent of implementation depends on the size and
  complexity of the organization

3
Types of Controls

• Preventative
• Focus is on preventing errors or frauds from
  occurring in the first place
• Typically implemented via policies and procedures
  within the organization
• Detective
• Focus is on detecting errors or frauds by
  examining financial data
• Typically implemented via management review of
  financial data

4
Best Practices for Small Businesses

• Controls surrounding cash
• Bank reconciliations should be performed monthly
• Investigate un-reconciled differences
• Investigate outstanding checks gt 60 days
• Bank statements should be received, opened and
  reviewed by someone other than the person
  performing the reconciliation
• Have them mailed to your home
• Dual signatures required on checks gt 1k
• Customer checks received should be endorsed for
  deposit only and deposited immediately by
  someone other than the person performing the
  reconciliation
• Secure blank check stock
• Print and file monthly reconciliations along with
  bank statements

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Best Practices for Small Businesses

• Segregation of duties
• Approval function and data entry function should
  be segregated for all accounting processes
• Examples expense reports, vendor payables, cash
  reconciliations, payroll
• Sometimes difficult to implement in small
  organizations
• Vendor invoices should be received and stamped
  approved for payment by someone other than the
  accountant if possible
• Background checks on new hires

6
Best Practices for Small Businesses

• Controls surrounding vendor payables
• Controller should not sign or mail checks if they
  are responsible for processing vendor invoices
• Utilize POs to authorize purchases greater than
  500
• Documents authorization for the purchase
• Signed by owner/manager prior to placing the
  order
• Match the PO to the vendor invoice prior to
  payment
• Periodic review of vendor files by owner/manager
• Know what vendors you are paying and why
• Stamp vendor invoices Paid once checks are cut
  and file vendor invoices with a copy of the check
  attached
• Review company credit card/AMEX statements
  monthly
• Review/approve employee expense reports

7
Best Practices for Small Businesses

• Controls surrounding payroll/commissions
• Review all payroll data prior to submitting
  anything to a payroll processor
• Compare salaries on quarterly 941s with payroll
  records
• Reconcile and review quarterly payroll records
  with third party payroll reports
• Ensure that overtime hours and rates are properly
  approved by supervisors/managers

8
Monthly Reporting Management Review

• Review monthly with your controller/accountant
• Actual results vs. budget vs. prior year
• Balance sheet and income statement
• Make sure you understand the reasons for
  variances
• Monitor Key Performance Indicators
• Cash reconciliations and bank statements
• Accounts receivable aging
• Accounts payable aging
• Fixed assets (if significant)
• Establishes a proper Tone at the Top

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A Final Note on Fraud

• ACFE conducted research on occupational frauds
  from 2006 to 2008 noting the following
• Median loss was in excess of 100k
• Most frauds are discovered by tips from
  employees, vendors or customers (or by accident)
• Many frauds last for 2 years prior to being
  discovered
• A lack of internal controls was the most commonly
  cited factor that allowed the fraud to occur
• Most occupational frauds are committed by
  accountants or upper management
• Most fraudsters are first time offenders (7 had
  prior convictions)
• Most common behavioral red flags are employees
  living beyond their means and/or experiencing
  financial difficulties