The topic of internal controls comes up quite often during my discussions with small businesses and nonprofit organizations regarding compliance. Anytime a business/organization has a board of directors, internal controls should be a top priority.
First, let’s discuss what the term Internal Controls means. Basically, it is the set of rules, procedures, and guidelines that a company or organization follows to prevent fraud and theft as well as ensure the financial records are accurate. As you can see, Internal Controls are quite important.
There are numerous ways to enact internal controls, and the size, as well as the type, of business will determine how detailed the controls need to be in order to be effective. Small businesses/organizations are sometimes plagued by fraud and theft due to weak controls. Therefore, I will discuss some simple ways to begin implementing controls that even the smallest business/organization can put into effect with ease.
A main component of Internal Controls is Segregation of Duties.
This means that the same person is not in charge of several areas of accounting. For instance, you do not want the same person collecting cash, making the deposit, and inputting the deposit information into the accounting records, and reconciling the bank account at the end of the month. If one person is responsible for all of these, it would be very easy for that person to deposit a fraction of the collected cash and keep the rest. When a separate person is responsible for each step, the chance of theft is reduced.
Recently, I learned of the “Swimming Lane” approach to assess weaknesses in internal controls. Please see the chart below/attached:
Ideally, we would want to see a different person in charge of each duty (see chart above). The more an employee/board member overlaps, the greater the chance of possible fraud/theft.
The next chart shows that the controls are lacking and need to be assessed:
Board Member 1 has access to cash and makes deposits. This member could easily keep some of the cash.
Board Member 2 enters accounting information AND reconciles that same information. It would be easy for this member to “hide” transactions in the accounting records.
Board Member 3 has access to all the duties and is therefore at the greatest risk of potential fraud.
I’ve created a “Swimming Lane” Excel template available at the following link:
Please feel free to customize this template for your organization and review with your board members.
If you have questions, or would like to schedule a consultation, please feel free to reach out to me.
Have a blessed day!
Shelly