You may be a sole trader thinking of taking on your first employee, or a small business that already has several employees. Employing staff means you are handing over part of your control, and this delegation will inevitably increase the risk of fraud and error occurring within the business.
This is where internal controls come into play. Here are some of the more relevant ones you may want to consider implementing.
- Good hiring procedures –in particular, picking up the phone and contacting those referees every time.
- Providing job descriptions and procedure manuals
- Solid training
- Keep morale high and give praise and recognition where it’s due – disgruntled employees find it easier to justify ripping off the business
- Use passwords
- Backing up data – important. Veechi Curtis, author & accounting software guru, recommends backing up daily if you do daily data entry and weekly if you do weekly data entry. Don’t forget to take your saved data off-site at regular intervals too. Regularly check that your back-ups are working correctly and at the end of the financial year make an extra back-up to keep off the premises.
- Void or reverse transactions instead of deleting them – leaving a more complete transaction trail
- Authorisation required for non-standard adjustments such as writing off bad debts and writing off damaged or lost stock
- Check audit reports to monitor the changes your employees are making to transactions
- Credit approval procedures for new customers – including the following up of trade referees
- Reconcile supplier statements with physical bills on-hand and your computer accounting system before paying
- Documentation to support all employee credit card spending and set reasonable credit limits
- Use pre-numbered documents and make sure all documents can be accounted for
- Good security over physical assets – for example, security systems in warehouses and restricted access to cheque books and cash
- Segregation of duties – for example, someone with access to cash payments from customers shouldn’t also be responsible for entering the transaction into your accounting system
You will need to weigh up how much each internal control will cost to implement against how much you stand you lose by not having it. Make sure you are seen to be using these controls yourself as your attitude to internal control will be passed on to your employees.
By implementing a good internal control system not only are you reducing the risk of fraud and error, but your financial records will be a fairer representation of your actual position and operational efficiency in general should be improved.