Why Business Owners Should Embrace Effective Internal Controls

Internal controls are the backbone of any small business, whether it’s a doctor’s office or a retail operation. Without them, your business cannot function effectively or profitably.

Here’s what the Association of Certified Fraud Examiners (ACFE) found in their 2014 Report to the Nation on Occupational Fraud & Abuse:

  • The median loss caused by fraud was $145,000
  • 22% of cases lost at least $1 million
  • 85% of cases dealt with asset misappropriations
  • 39% of cases were corruption schemes
  • 9% of cases dealt with financial statement fraud

Additionally, the ACFE noted that smaller businesses (less than 100 employees) tend to suffer disproportionately large losses compared to larger companies. Employees committed 42 percent of frauds. Collusion – more than one perpetrator – resulted in the largest losses.

The good news is that organizations with internal controls fair better than those without. Here are three ways to ensure internal controls are effective in your small business. 

Internal Controls Aren’t Just for Finance

If you think internal controls are all about financial oversight, you are wrong. According to the Small Business Administration (SBA), “internal controls should include finance, operations, and administration.”

The purpose isn’t just to protect assets. It also is to gain operating efficiencies, improve customer service, and ensure regulatory and legal compliance. To do this you need to develop internal controls that discourage fraud, eliminate losses, and achieve business objectives.

Proper Separation of Duties Vital to Internal Controls 

Regardless of whether you’re dealing with accounting, human resources, security, or any other operation within your small business, no one person should have full control over a single business function. A division of duties helps to prevent theft and fraud, and to reduce errors.

Unfortunately, smaller businesses sometimes find this aspect of internal controls difficult due to the number of staff members. However, being an active participant in the operations of your business can help diminish issues. Additionally, the March/April 2012 issue of the Tennessee CPA Journal offers a chart to help segregate accounting duties in small businesses. This provides a great jump-off point.

Develop Internal Controls Checklists 

One of the best ways to protect your small business is to have a checklist of actions that staff members must implement for each duty they perform. For example, the ACFE suggests taking these actions when hiring new employees:

  • Past employment verification
  • Criminal and civil background checks
  • Credit checks
  • Drug screening
  • Education verification
  • References checks

For a complete checklist to help test the effectiveness of your fraud prevention measures, refer to pages 76 and 77 of the 2014 ACFE report.  The key take-away is that internal controls are only effective if you adopt them throughout your small business.

Remember, running a business successfully does not need to be complicated.  Keep it simple!

For more valuable articles to help you successfully manage the challenges of growing your business profitably, please search our blog at our website www.portalcfo.com.

 

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