You read about this in every newspaper in every town in the entire country:
Some bookkeeper, trusted by the owner of a small business, embezzles
thousands of dollars. If the theft doesn't put owner out of business, it
certainly causes a major headache.
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The reason we hear of these cases so often is that, in a small business,
there may only be the owner and a bookkeeper. The owner doesn't like doing
the books, doesn't understand them, and relies on this one person to take
care of things. The bookkeeper, who is usually having personal financial
difficulties, takes a small amount of money intending to pay it back. No one
seems to notice, so more is taken. Over a period of time, it starts to mount
up to a lot of money.
This is where the concept of internal control comes in. Essentially,
every business should have, at some level, an internal control system in
place to protect against losses, both intentional and unintentional. This is
because internal control systems will: 1) protect cash and other assets; 2)
promote efficiency in processing transactions; and, 3) ensure reliability of
financial records. An internal control system consists primarily of policies
and procedures designed to provide reasonable assurance that these three
objectives will be achieved. The size and complexity of the business will
determine the extent of the internal control system.
Regardless of size, one of the most important aspects of an internal
control system is the concept of separation of duties. Separating duties
makes it more difficult for theft and errors to go undetected. It is highly
unusual for two employees to collude in an effort to steal from the company.
I worked as an internal auditor for a newspaper chain for three years. My
job was to walk in to the newspaper offices unannounced and go directly to
the cash boxes, count them, and verify receipts. One of my most important
audit steps was to make sure the internal control procedures were in place
and working properly. Here are a few suggestions for internal control
procedures regarding handling of cash:
- Allow only specific designated individuals to handle cash.
- Give responsibility for bookkeeping to an individual who does not
handle cash.
- Use numbered receipts to document all payments.
- Make all bank deposits promptly.
- The person who prepares the bank reconciliation should be different
than the one handling cash.
- If possible, the person who makes the bank deposit should be
different than the one who handles the cash and the one who prepares the
bank reconciliation.
- Make deposits intact with no amounts withdrawn to pay expenses.
- Keep cash and checkbook in a locked drawer or cash register.
- Since tills will never be 100% correct all the time, establish a
tolerance level for overages and shortages to determine the point at
which corrective measures will be triggered.
- Make all disbursements by check, except minimal amounts paid from
petty cash.
- Make certain every payment is related to a paper document, such as a
voucher, to ensure that a paper trail exists for all disbursements.
- Conduct random surprise counts of petty cash and cash drawers.
- Count inventory and other assets frequently and compare with company
books.
An internal control system set up early as a preventative measure is more
efficient than establishing a corrective system in reaction to a loss. If it
so happens, that there is just you and the bookkeeper in your small
business, you need to learn how to do some of the bookkeeping tasks so you
can spot check the bookkeeper s work. That, in itself, is an excellent
preventative measure.
