Internal Accounting Control: Keeping it Honest - By Chris Malburg

Internal Accounting Control

By Chris Malburg

Contact Information: Jim Miller, CPA

Tel (310) 539-9400 | JMiller@fong-cpas.com

Internal Controls: Keeping it Honest

                The words, fraud and embezzlement strike fear into the hearts of every CFO. They have responsibility for oversight of their company’s financial operations. The occurrence of any financial irregularity draws into question the trust that all company stakeholders place in its financial reports and statements.

Can internal controls prevent embezzlement?

                The first misnomer is that internal accounting controls prevent accounting irregularities, misappropriation of assets and embezzlement. They cannot. No system of internal accounting controls can guarantee there will never be an ugly incident and still allow the company to function. The most that even the strictest control system can guarantee is a significant deterrent against improprieties. 

                The bottom line is that if a company insider is committed to stealing, somehow, some way they will accomplish their goal. However, the barrier that the system of internal accounting controls erects says: If you steal or defraud us, we will immediately discover your crime and we will prosecute. 

                The intent of most internal accounting control systems is to first limit the value of assets any single person can misappropriate. Next, the controls need to make it so difficult, time-consuming and expensive to perpetrate a defalcation that the return simply isn’t worth the cost. Finally, the system of controls must make discovery of an irregularity immediate and definitive. 

For example, say that the simple cash disbursement controls at a manufacturing company work like they should. The controls separate the tasks involved among different people. Here’s what happens:

1.       A designated custodian controls the check stock and keeps it under lock and key

2.       A different person records and prepares accounts payable transactions for disbursement

3.       Someone else prints the checks.

4.       Another person controls the check signature stamp or signature plate.

5.       A final person reviews the printed checks with their supporting documentation and mails them once approved.

6.       Someone not involved in any of the above reconciles the bank accounts.

Such a control system isn’t cumbersome or overly time consuming. Everyone knows the procedure and performs their part of it. For someone to write themselves an unauthorized check and cash it, there would have to be collusion between at least two, maybe three people. They would likely be caught within a few days of the embezzlement. It is also written company policy to prosecute should such an event occur.

Why are controls important?

                Fong & Associates regularly assesses and reviews systems of internal accounting controls. The purpose is almost never to catch a thief. Instead, it lends a great peace of mind to the management team, investors and owners. That by itself is worth the effort.  Further, a good deal of the controls are there to ensure that the accounting records are accurate. Fong & Associates designs internal controls for maximum accuracy at the time the original accounting entries are made. Additional controls review the accounting records after posting to be certain they are correct. When a third party looks at the financial statements they can rely on them as accurate.

                Additionally, many outsiders rely on a company’s internal controls to ensure accuracy. For example, independent auditors may or may not rely on the system of internal controls. Bankers assessing a company’s credit worthiness rely on the internal controls when they use internally prepared financial statements. So do investors receiving their periodic progress reports from the company in the form of internally prepared financials.   

What internal control services does Fong & Associates offer?

                We’re a full service public accounting firm. Among the consulting services we provide are review of our client’s systems of internal accounting controls. Along with that review is an assessment of any weaknesses with recommendations for strengthening.  We always keep foremost in mind that management has a business to run. Any changes in controls must be cost effective—that is, they must not cost more to implement than the benefits they produce. At the end of the day, the strengthened control system must give the company’s stakeholders an increased peace of mind. If you want more information about our work in internal controls, call Jim Miller at 310 539-9400 or JMiller@fong-cpas.com .

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Chris Malburg is a huge supporter of Fong & Associates as well as CEO of Writers Resource Group, Inc. providers of literary services to enterprises. Contact Chris at CRM@WritersResourceGroup.com

 

Profile on Jakosalem, Head of the Tax Department, by Chris Malburg

People want to know about their accounting professionals.  Not just their professional credentials and academic degrees. You can get that anywhere. People want to know the “person.”  We’ll spotlight the person behind the 1040 at Fong & Associates in each newsletter issue.

Contact Information: Juliet A. Jakosalem, CPA, MBT Senior Tax Manager

Tel (310) 539-9400 ext. 208 | JJakosalem@fong-cpas.com

 

                Juliet Jakosalem does not like losing. It has rarely happened in the numerous IRS audits in which she’s been involved. “I have a pretty good track record when it comes to protecting clients from tax penalties,” says Juliet. “But winning before the IRS isn’t like scoring the game-winning goal in one of my son’s hockey games. It’s much more subtle. When the IRS finally stipulates that there is no change to the amount owed—when you finally receive that determination letter—you know that you won one for the team. That’s as good as it gets for me.”

                Juliet has headed the tax department at Fong & Associates since 2011. She is the firm’s go-to person for all tax-related matters involving both corporate entities and personal tax issues. Her background at the international giant, KPMG Peat Marwick, an undergrad degree from Cal and a Masters from USC along with 20 years in the public accounting field have prepared her well for this role.

A multi-cultural approach

                Juliet’s sensitivity to people’s different orientations and mindsets comes from a variety of sources. Her father, a US Naval veteran, moved the family to Long Beach where she grew up. Her family is originally from the Philippines. “Both cities you have a melting pot of cultures: American, Latino, Japanese, Chinese and Pilipino. The languages are different and so are the customs.” She carried this passion for diversity with her to Berkeley where she majored in international history and French. She studied in Strasbourg, France.“ I thought I was headed for a career in international business or international education. I did land there—sort of—I do a lot of work in foreign taxation matters. I love it.  Everyone’s business interests are now globalized.  If you’re contemplating a foreign transaction and ignore the tax implications in both countries, you may be in for an unpleasant surprise. The challenge for me is to identify what’s at stake and educate myself and the taxpayer to make it in compliance.”

Finding inspiration in an unlikely place

                I asked Juliet where she finds the inspiration to do a job as demanding and meticulous in its detail as hers. “Really, it’s the clients who inspire me,” she says. “My clients have run the gamut from a Super Bowl winning quarterback, academy award winning actors, exciting super food distributors, pilots, lighting manufacturers, toy producers, and the sweetest nonagenarians ever (I had to look this one up—those between 90-99 years old). You name it, I’ve seen it.  At Fong & Associates, our clients are real people and the companies they own are all equally important. The money on the table with the thorny tax issues I’m responsible for solving means something very real to them and to me. The margin of error is much less if they make the wrong decision.

               

A 360-view of personal and corporate finance

                It’s true that domestic and international tax matters soak up much of Juliet’s time. However, she does come up for air. She says, “I’ve always thought of myself as a full service financial advisor. My clients look to me for advice and decisions regarding book keeping and tax planning as well as representing them before the IRS. One of the most gratifying cases involved the sale of a company that was stalled because of uncertainty over a possible future tax liability. We stepped in and requested a ruling changed. The IRS reconsidered, ruled no change in taxes owed and the sale went through.

Challenging the 800-pound guerilla

                Juliet is not that imposing a person in physical stature. She makes up for it in tenacity. She says, “The IRS is not the monster everyone thinks. Sure, they can be tough. But most of their people are individuals just like us with families, mortgages and a job to do. My strategy when working with their agents is to treat them as a person—not an adversary or a friend. Before every meeting or conversation with the IRS I have a definite goal to achieve. I make my case using precise and accurate accounting and tax theory as well as analytical procedures. Eventually I work the conversation and the conclusion around to achieving my goal.

After hours

                Like everyone, down time is precious to Juliet. “I am lucky to have a wide circle of friends whom I have known for years—decades in many cases. No matter how busy I get between work, my husband of 23 years and our son, I carve out time to connect. Long-term relationships have a grounding effect in terms of keeping in mind what’s truly important in life.

Through her long career in public accounting, Juliet has trained and worked with a number of now highly placed and extraordinarily successful people. “I absolutely keep in touch with each one of them. When they pick up the phone all I have to say is, Hi, it’s Juliet. The fun comes in knowing that I had just a little something to do with their success.”

Why?

                You’ve probably guessed that this is always the last question I ask all whom I profile. Why are you here? What’s your passion? Your cause? I’ve found Juliet Jakosalem to be an intensely private person. Indeed, you cannot imagine what it took to drag this much out of her. So, I wondered, how is she going to explain, why? Juliet takes it from here. “I’m a teacher. Giving people the tools to improve themselves is my cause. It is why I am here. Public accounting allows me to do that in a highly quantifiable, measurable way. When I am finished with your project, you are in a better position than you would have been without my help. Moving people into this greener pasture is my passion.”

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Chris Malburg is a huge supporter of Fong & Associates as well as CEO of Writers Resource Group, Inc. providers of literary services to enterprises.  Contact Chris at CRM@WritersResourceGroup.com