Internal control measures prevent employees from taking advantage of your business. Although it's important to have a high level of trust in your employees, people can do surprising things when they feel desperate or stressed. The importance of an internal control system involves preventing fraud, theft and property damage from occurring within your organization.
The Importance of an Internal Control System
You should have an internal control system in place before anything unfortunate happens. It's like installing a carbon monoxide detector in your home. You might think the chances of carbon monoxide exposure are too slim to warrant such a purchase, but you'll be kicking yourself for not taking proactive measures if your family ends up getting sick from this gas anyway.
Likewise, you may think you know your employees well enough to trust them to never take advantage of your finances or to help themselves to company property. After all, a small business is like a family, right? Unfortunately, you can never be too careful. In the case of financial fraud in particular, the repercussions can extend to the entire business's reputation, even if only one person was the perpetrator.
Examples of Why Internal Control Is Important
To explain why internal control is important in a business, it's helpful to share some examples.
- Approval loopholes: An employee who ends up being able to approve items that benefit him in some way has a conflict of interest. For example, no one should be able to give himself a raise or promotion. Employees also should not be able to make large purchases without approval from another person.
- Financial fraud: When only one person ever sees, evaluates and shares the financial reports while also handling all the cash flow, it's all too easy to intentionally adjust the numbers for personal benefit. Also, mistakes can be made on accident that still have an effect on the company. Either way, the importance of internal control in accounting is astronomical.
- Stealing property: Everyone walks away with a company pen or other mundane office item now and then. However, other items can be stolen, whether it's inventory from the warehouse or just basic supplies stocked around the office. Be careful about intellectual property as well. Your company policies should be very clear about theft of all kinds.
Creating Internal Control Systems
To avoid some of these problems, apply these internal control systems:
- Multi-level approval processes: The person who submits a request should have no further role to play in the approval process. It goes back to the idea that the judge, jury and executioner cannot be the same person in a fair justice system. Create a clear policy about how all requests should be submitted, evaluated and approved.
- Rotate financial team members: If you have a small business, it makes sense that you probably only need one accountant. However, to avoid potential problems with fraud, whether intentional or accidental, the books need to be reviewed by other people on a regular basis. Cross train your employees to fill different roles and have different people review and handle the accounts every other week.
- Install locks and cameras: Everyone does not need the key or the code to the storeroom. Give keys to the employees who actually need them. Change the locks when an employee leaves, as annoying as it may seem. If you use code locks, change the codes on a regular basis to prevent the code from leaking out to people who don't need them. Install security cameras to show exactly who comes and goes and what they do in the storeroom. This can deter people from the start.
Consider an Internal Control Audit
The word "audit" doesn't have to be scary. You don't know what you don't know. Hire a consultant to audit and evaluate your current processes and to give recommendations for an internal control system to prevent any problems.