Internal Controls and Small Businesses

By: Ben Pena, CPA, CFE - Partner (Posted: 2/14/2013)

Internal controls or internal checks and balances are important to safeguarding your company’s assets such as cash and ensuring accurate reliable financial accounting and reporting. Also known as “segregation of duties” within an organization, as it processes accounting transactions, Internal controls ensure that the accounting of business is on the up and up and provides a good way to monitor day to day activities. Lack of such internal controls in a small business environment is common due to the smaller amount of personnel involved in the accounting function.

For example, if a company has one person that has authority to 1) prepare checks, 2) sign checks, 3) record the checks in the accounting system and 4) perform monthly bank reconciliations, then the controls related to the disbursements of cash in this organization are deemed weak. There would be a lack of segregation of duties because that one person has the authority to disburse cash in any way he pleases and no one would know. An environment such as this presents an unusually high risk of employee embezzlement.

In order to mitigate this risk, most small businesses establish internal controls to “segregate” these duties between two or more people. The objective of these controls is to provide a way to monitor incoming cash receipts as well as outgoing cash disbursements in order to ensure the company’s cash is closely watched and protected.

A common misconception is that an organization’s accounting staff is limited to one person and an effective internal control system cannot be achieved. In other words, adequate segregation of duties cannot be obtained because the company is too small. The truth is, smaller businesses can easily implement internal control measures to ensure the safeguarding of assets and accurate financial accounting. A sound accounting practice in the example noted above would be to segregate the check signing duties from the transaction recording duties. Another measure is to have a “second set of eyes” review a check run listing prior to mailing checks. This alone will significantly reduce loss risk and is very easy to implement.

Internal controls are not something that most small businesses consider on a regular basis, but are important enough to ensure loss risk is mitigated. Most common accounting areas where internal controls are important consist of:

Prudent business owners seek professional counsel relating to the financial affairs of their business. A trained professional such a CPA can make an assessment of your company’s control environment and recommend internal controls to address the open loopholes or areas of vulnerability in your company. For more information please contact Ben Pena or Ricky Longoria at Burton, McCumber & Cortez, L.LP at 956-618-2300.