In its simplest form, internal control is the sum of everything your business does to identify and reduce risks that, according to the U.S. Small Business Administration, often consume about 5 percent of a business’s annual revenue. Although businesses of all sizes face risks of fraud, theft and abuse of business assets, small businesses with inadequate documentation procedures are often more vulnerable. Documentation procedures contribute to, and are part of, strong internal controls.
While well-developed documentation procedures strengthen both preventive and detective internal controls, inadequate documentation procedures are a main reason why some businesses don’t find out that theft or fraud is occurring until it’s too late, the "Journal of Accountancy" notes. Formal documentation procedures provide guidance for implementing controls, and they increase accountability, as your employees must prove and verify, rather than simply state, that they followed or performed an internal control.
Documentation procedures create traceable evidence, including who was involved in a task or a financial transaction and when and how she was involved. You can create procedures such as time and date stamping that work behind the scenes as well as set documentation rules for employees to follow. Both are equally important for reconstructing actions when tracing transactions and creating audit trails. For example, signed voucher slips, copies of petty cash replenishment checks, an employee’s log-in ID and computer time and date stamps all provide audit trail evidence.
More Secure Information Management
Actual or scanned attachments, footnotes in a financial report and a computer transactions change log are examples of documentation procedures that contribute to and strengthen information management controls. All are useful for documenting the reasons for correcting or adjusting paper or electronic business records, which ultimately helps you prevent and detect fraud and employee theft. A corresponding date-time stamp and evidence of prior approval, such as the department manager’s initials, strengthens information management controls even further.
Better Quality Control
In addition to preventing both internal and external fraud, warehouse and inventory-management documentation procedures can support quality controls. These include requiring warehouse employees to count, inspect and document damaged incoming and outgoing merchandise. Fraud and theft prevention procedures that contribute to good internal control include a documentation rule requiring employees to fill out, sign and submit a pick sheet for every outgoing customer order and tagging procedures that record and identify inventory items, including descriptions, part numbers, units of measure and quantities.
- U.S. Small Business Administration: 6 Tips for Preventing Employee Theft and Fraud in the Workplace
- Journal of Accountancy: Internal Control Guidance -- Not Just a Small Matter
- Saylor University: What Are Source Documents in Accounting?
- University of Washington: Documentation
- Accounting Tools: Inventory Internal Controls
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