Internal Accounting Control
By Chris Malburg
Contact Information: Jim Miller, CPA
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 .
# # #
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
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