Preface: Internal control processes are a vital component to financial reporting. If your business doesn’t give proper attention to internal controls or is foreign to those systems, this should give you an understanding of what internal controls are and how to important they are to quality financial reporting.

Accounting with Appropriate Internal Control Processes

The reliability of your businesses financial reporting is a process; and that process is also known as internal controls. Internal controls are a system of financial governance designed to facilitate quality assurance on your financial reporting, governance that provide users (you) with accurate financial data. If your business has not implemented a process of appropriate internal controls, that plan should be designed for your business sooner rather than later. Strong businesses have superb internal controls.

A properly designed internal control plan contains i) policies and procedures that implement segregation of duties in accounting processes ii) hiring of qualified personnel to perform assigned responsibilities iii) provides for soundness of procedural authorization and reporting of financial transactions iv) monitors the practices of the personnel performing the accounting role(s).

Segregation of duties minimizes the risk of fraud in your business and corresponding asset losses. Segregation of duties includes examples of the following – those who are issuing customer invoices should not collect checks and oversee accounts receivables; those in charge of accounts payable should not have check signing privileges, those who order supplies or inventory should not post the order on the general ledger or have control over accounts payable; those in charge of payroll should segregate the person who calculates the gross and net pay from the person who verifies the payroll balances and signs the checks. Segregation of duties is a preventive control.

Hiring qualified personnel is a characteristic of a well designed process. A qualified staff will have the business acumen to ask the right questions, and see potential problems before they become big problems, hence saving you thousands or tens of thousands of dollars in say wrong costings calculations or excessive overhead. A highly qualified staff will verify completeness of transactions and accuracy of reporting and allocations of revenues, expenses, assets and liabilities for analytical procedures.

The soundness of reporting financial transactions and authorizations will require management to keep a close eye on the implementation of the internal control process. Authorizations of expenses should be reviewed by qualified and appropriate personnel to verify that they indeed are for business purposes. Purchases over certain thresholds should require say dual authorizations. Specific cut-off of transactions and events will need monitored with month-end and quarterly closes. The specifics and complexity of an internal control process will vary from business to business.

Detective controls are also a component of internal control. Monitoring personnel in their accounting role is a function of management. Management will need to implement and oversee the internal control process and keep financial reporting transparent for the users (managements and owners). Daily attention should be given to monitoring the processes and controls in financial reporting. Management should circulate the office to ensure compliance with segregation of duties, making inquiries and observations while keeping an open door policy and continuous professional skepticism. Identifying weaknesses in internal control early could ameliorate future problems. Monitoring internal controls is key to the effectiveness of the internal control process. Monitoring of the internal controls should include frequent checks to the processes and systems to ensure it is working as designed.

Summary: Every business that strives for successful financial reporting, needs a well-designed internal control process. If you have questions regarding the effectiveness of your current internal control process, and the effectiveness of the system, or maybe how to implement a new internal control system, talk with your CPA.