Internal financial controls can be the foundation of a good business. And they are often at the heart of the risk assurance process because they deter fraud and soothe investors.
For the last installment in our risk assurance series, let’s look at these internal financial controls. We’ll examine what they are, some of the more common ones in small businesses, and how a CPA can help you implement them.
What are internal financial controls?
Simply put, internal financial controls are any process, procedure, or rule that helps create accuracy in the financial records of a business.
Ironically, most small business owners don’t pay enough attention to them. But in the pace of business, areas like this tend to get left behind because they require planning and strategy. And there doesn’t seem to be enough time or expertise to make them happen.
That’s why the risk assurance process is so important. It brings in a third party to do most of the research and heavy lifting and provides a substantial knowledge base for employees.
Speaking of knowledge, let’s add to yours by looking at some of the more common controls your small business would benefit from after implementing risk assurance.
Segregation of duties
This is one of the most common (and challenging) controls that must be implemented. That’s because a few people wear many hats in most small businesses. But even if you only have a few employees, a CPA can help identify ways to separate critical tasks and responsibilities. For example, the business owner may approve transactions while someone else handles recording and processing.
Password protection, limited access to sensitive information, and even physical access to specific workspaces are all low-cost controls that can help with risk assurance. This may sound out of the realm of a CPA, but one with plenty of small business experience will be familiar with these ideas…and more.
Inventory Controls and Vendor Management
If you live in a state that taxes business inventory, then controls to track levels, make physical counts, and reconcile them with your records are a must. Poorly controlled inventory can create serious economic problems for a small business.
Unfortunately, some headaches start before the first widget hits your warehouse. That’s because problems often occur with vendors when insufficient oversight is applied. It’s easy for inventories to get bloated because unscrupulous vendors offer incentives to buyers. So, reviewing contracts and properly authorizing vendor payments is a must.
Cash is one of the most slippery elements in a small business. It can be challenging to track. Unfortunately, some employees take advantage of that. So, your CPA will probably offer a host of ideas to help you keep control. Some of the best are reconciling accounts regularly, tracking beginning and ending cash balances at the point of sale, and limiting the number of authorized signers for checks and digital payments.
The Bottom Line
If you are planning your business or can’t afford to go through a formal risk assurance process, these are still areas to learn. A good CPA will be happy to offer advice on these areas, no matter what your situation. And it can provide a solid foundation for risk assurance when the time comes.