Safeguard Business Assets with (Better) Internal Controls

February 24, 2017

Safeguard Business Assets with (Better) Internal Controls

Many business owners are discovering that their assets are not as well protected as they thought.  Smaller businesses with one or two employees managing all of the finances are particularly susceptible to misappropriation of assets.  Often there are no checks and balances to verify that transactions are accurate or appropriate.

According to the Association of Certified Fraud Examiners’ 2016 Report to the Nations, the median loss for all the cases in their study was $150,000. When schemes lasted more than five years, the median loss rose to $850,000.  Businesses with fraud hotlines were much more likely to detect fraud through tips than those without.

When proper financial and operational controls are not in place, employees (and owners!) can learn to manipulate the accounting system to their benefit.  Whether they take money from the company or their mistakes are undiscovered, the end result can greatly impact a company’s management decisions, financial reports, tax filings, and financial stability.

Unfortunately, once your financial records have been altered, discovering problems is extremely difficult.  Most standard accounting practices are not designed to uncover internal problems such as embezzlement.

Therefore, the best way to safeguard your company’s assets is to recognize and improve weaknesses in your internal procedures.  The following business practices and procedures can help you minimize potential internal control problems:

  • Set the tone at the top: Management must set an ethical atmosphere in the workplace and uphold those values at all times.  Employees are more likely to behave in the same manner as management sets.
  • Related duties should be assigned to different people: Certain accounting and operational functions are designed to cross-reference each other for accuracy:
    • Writing, signing, and mailing of checks
    • Ordering, paying for, and receiving of materials
    • Handling cash and recording cash in accounting system
    • Accepting customer orders, fulfilling orders, and invoicing customers

      These procedures can reveal inconsistencies in your records in a timely manner.

  • Reconcile and scrutinize your bank statements every month: A bank statement can tell you a lot about your business if you review the information in a timely manner.  Examine checks and endorsements, track transactions between accounts, compare payroll checks with employee records, and ask questions.  Examine bank statements for unusual withdrawals.  To be more proactive, consider positive pay systems if your bank offers this service.
  • Examine supporting documentation before you sign a check or authorize a transaction: When you insist on reviewing original documentation, your employees become more accurate and communicate their needs more clearly.  You should also verify the names of your vendors and your employees occasionally.  And remember to cancel supporting materials after signing a check.  Consider dual signatures on checks over a certain threshold.
  • Lock and protect your valuables: Keep blank checks and signature stamps secured and deposit cash and checks daily.  Stamp all checks received “for deposit only”.  It’s also important to secure fidelity bonds and insurance for all accounting and key personnel.
  • Know your employees and examine behavior changes: Always verify employee references before hiring.  Also, consider the need for conducting other background checks as appropriate, including but not limited to the need for credit information, motor vehicle reports, and criminal searches. Many white-collar crimes go unreported and continue to be repeated.  Watch for trouble signs: possible substance abuse, change in lifestyle, living beyond means, possessiveness of work, or not taking vacations.

This limited list of internal controls can help reveal financial discrepancies and protect your company’s assets as well as recognize the excellent efforts of your staff.

For more information on how Herbein + Company, Inc. can help you review your current internal controls or develop and implement the proper controls to protect your company, contact Steven M. Wolf at