Internal controls ensure the assets of your business remain free from fraud!
Effective internal controls are crucial to SMEs as they are more vulnerable to fraud, theft and errors. Small businesses generally have weak internal controls and these failures begin with the business owners and management.
Internal controls ensure the assets of the business remain free from fraud, assist in financial information accuracy and reliability while ensuring compliance meets the necessary requirements.
Below are some internal controls that can assist with SMEs:
- Cash receipts – this is a common risk area as cash receipts are easily available and the complexity of identifying such transaction. Controls such as segregation of duties between accounts receivable and an employee accepting cash receipts. Ensure if there are large amounts of cash received it is deposited daily and controlled by a cash register or some form of documentation.
- Bank accounts and credit cards – a review of cheques, cash register and bank statements will assist in reducing risks, particularly when performed on random days. Reconciliation of bank accounts regularly and separation of cash disbursements and purchases for approval will prevent fraud and errors. Additionally, such controls should be in place for business credit cards and card holders should be accountable for providing supporting documentation of purchases.
- Purchases and accounts payable – supporting documentation from suppliers including invoices, purchase orders and receipts are crucial to protecting physical assets and when reviewing payments. In relation to inventory purchases, this can be a greater risk area for fraud and error, and such procedures should be implemented to inspect condition and count items.
- Payroll – similarly to cash receipts and many business procedures, segregation of the payroll officer and distribution of pay is essential to any business. Additionally, bank account deposits should be reviewed to ensure there are no duplicate bank accounts.
Segregation of duties is crucial to all systems involved in the finance and operations of a business and can be the greatest opportunity for SMEs. Reconciliations for bank accounts, accounts receivable and accounts payable should be completed on a regular basis, at least monthly. Owners and management should also ensure adequate supervision of employees is conducted, as well as creating a culture of fraud awareness and finally, ensure there is extensive review and approval of procedures performed.