Internal controls in business organizations

President

Inform the President of any new internal control requirements if the company decides to go public.

Instituting a system of internal checks and balances would be foremost in my recommendations to the company president since most internal control systems provide for independent internal verification; this principle involves the review of data prepared by employees. To obtain maximum benefit from independent internal verification:

Companies should verify records periodically or on a surprise basis.

An employee who is independent of the personnel responsible for the information should make the verification.

The company should also look at incorporating a Voucher Control System. Most medium and large companies use vouchers as part of their internal control over cash disbursements. A voucher system is a network of approvals by authorized individuals, acting independently, to ensure that all disbursements by check are proper.

When looking to hire new employees, it is vital that the company utilize the extensive resources on the web in providing for complete background investigations. A lot of wasted time and energy could be recouped using effective human resource controls. Effective web access controls could likewise prevent embarrassing behavior and lost company time on the part of current employees (ie downloading porn, idle surfing/shopping, etc.).

More oversight of the petty cash fund would also certainly be in order. "Internal control over a petty cash fund is strengthened by: (1) having a supervisor make surprise counts of the fund to confirm whether the paid vouchers and fund cash equal the imprest amount, and (2) canceling or mutilating the paid vouchers so they cannot be resubmitted for reimbursement."

Advise the President of what the company is doing right (they are doing some things well) and also recommend to the President whether or not they should buy the indelible ink machine. When you advise the President, please be sure to reference the applicable internal control principle that applies.

Although it might at first glance appear that having one person perform as both Treasurer and Controller, given that it streamlines many of the companies processes, is a plus, this is also a double edged sword with potentially dire consequences (see below). It is likewise commendable that checks be locked in the accountant's safe but, as we'll see, that area of responsibility could be better allocated.

On the other hand, kudos to the fact that he is now using pre-numbered invoices since, under the documentation procedures principle, "all documents should be accounted for; prenumbering helps to prevent a transaction from being recorded more than once, or conversely, from not being recorded at all."

Buying an indelible ink machine is also, without a doubt, a no-brainer good idea for not only improving internal security but guarding the company from fraud outside the company. Since "washing" checks is a very common form of fraud/theft, an indelible ink machine would go a long way protecting the companies interests

Advise the President of what the company is doing wrong (they are definitely doing some things poorly). Please be sure to include the internal control principle that is being violated along with a recommendation for improvement.

To begin with, the principle concerning segregation of duties applies to the Treasurer serving as controller since they both purchase and pay for supplies ("an accountant should have neither physical custody of an asset nor access to it"). This is also covered under the segregation of related activities since "making one individual responsible for related activities increases the potential for errors and irregularities; companies should assign related purchasing activities to different individuals. Related purchasing activities include ordering merchandise, order approval, receiving goods, authorizing payment, and paying for goods or services. Various frauds are possible when one person handles related purchasing activities."

Similarly, allowing one person to receive checks and complete the monthly reconciliation is just asking for trouble since this is a violation of preferred reconciliation procedures; "To obtain maximum benefit from a bank reconciliation, an employee who has no other responsibilities related to cash should prepare the reconciliation. When companies do not follow the internal control principle of independent internal verification in preparing the reconciliation, cash embezzlements may escape unnoticed."