The Importance of Internal Controls

No company wants to be the victim of fraud or embezzlement. In one current case, Pedro Espada and his son stole more than a half a million dollars from a nonprofit health care network. Mr. Espada was the chief executive and president of the health care group, and his son held positions at the subsidiaries. According to the New York Times, “Mr. Espada intentionally made more than $115,000 in personal charges on a corporate credit card” (March 14, 2012).

Unfortunately, this is just one example of many highlighting the importance of a detailed internal control system in order to prevent fraud and embezzlement. The newspapers are full of scandals. Establishing internal controls will protect a company’s assets. It also ensures that reliable accounting records are maintained. In addition, internal controls benefit a company’s efficiency and  managerial policies.

Establishing Internal Controls

In order to properly safeguard a company’s finances, consider establishing internal controls in the following areas:

  • Establishment of responsibility: For example, the employee representing the credit department must be distinct from the salesperson. There should be another individual recording the sale in the company’s books.
  • Segregation of duties: Divide up the responsibilities as a checks and balance system of sorts. For example, assign separate employees to handle the authorization of transactions, the custody of the funds and the record keeping.
  • Documentation procedures: Keeping a detailed paper trail of cash transactions and checks.
  • Establish physical, mechanical and electronic controls: For example, unused checks should be kept under lock and key along with the petty cash box. Bank reconciliations should also be done regularly.
  • Independent internal verification: Have an unrelated internal party verify the activites carried out in the accounting department and the accuracy of recorded transactions.