Establishing Internal Controls

There are basic actions that you can take in implementing an internal system of controls, including the following:

• Screen applicants before they are hired.
• Periodically examine canceled checks to see if there is anything unusual.
• Take precautions in preparing payroll: have more than one person prepare it, have several different people prepare it, or oversee it yourself.
• Have two people sign off on checks, preferably in front of each other.

Creating an Environment That Discourages Dishonesty

While there is no foolproof system of accounting or internal control that will absolutely prevent employee dishonesty losses, an environment can be created where employee pilfering is discouraged.

Review potential problem areas. The first step is to review every area where potential dishonesty problems could arise, including:

• inventory control
• data processing
• purchasing
• receiving
• bookkeeping
• cash disbursements

Setting up an internal audit system. The next step would entail setting the mechanisms in place to remove the temptations that could make an otherwise honest employee dishonest.

In setting up an internal audit system, it's common procedurally for most companies to divide financial responsibilities and functions so that no one employee controls all aspects of a transaction. Hence, insurers and consultants recommend the following:

• Require checks to be countersigned by two responsible officials.
• Limit the endorsement of checks, by anyone other than the owner, to deposits for credit only.
• Delegate the responsibility for receiving checks and cash to someone other than the person who records incoming funds.
• Mail statements to outside accounts directly at least monthly.
• Examine payroll records periodically to prevent padding.
• Make sure that employees responsible for ordering goods and supplies are not the same ones responsible for receiving them or paying for them.
• Do not give the person who has the authority to write off bad debts the authority to make a credit sale or loan.
• If someone else does payroll, make sure you have access to payroll data on the computer and that no one changes the passwords or access requirements for that data.

What else you need to do. Dividing financial responsibilities and functions is not enough, though. Take an inventory of your merchandise at least annually and have an outside public accountant audit your cash and accounts annually.

An employee who never takes a vacation could be concealing acts of dishonesty. All employees, but especially the ones who have access to your business records, should be required to take a vacation annually.