The successful operation of a business requires control by top managers and owners. This is true whether we’re talking about a large Fortune 500 company or a small privately owned mom and pop business.
Policies and procedures are put in place to give top management confidence that the company’s objectives are being met. These policies and procedures are called Internal Controls.
There are 2 main types of Internal Controls Accounting Controls and Administrative Controls:
Accounting Controls are designed to safeguard the assets of the company and to insure that accounting records and financial statements reveal reliable information.
Administrative Controls are designed to insure quality job performance by employees with regard to company operations and compliance with all applicable laws and regulations.
The ultimate purpose of Controls is to prevent errors and fraud and to promote efficiency. Controls should help to eliminate or reduce surprises and keep the company moving toward it’s goals.
Controls include a range of responsibilities such as: approvals, performance evaluations, separation of duties, account reconciliations, verifications, authorizations, passwords, etc. They also include policies regarding employee conduct such as personal phone use, harassment, or safety while traveling on the job for example.
But we have to acknowledge that no system is foolproof. It’s possible that conspiring employees can cover up small or large embezzlement, no matter what policies are in place. Controls can provide reasonable, but never absolute, assurance to management
When establishing Controls, companies are always limited by the reality of resource constraints. Controls must be monitored and checked by supervisors and managers. So the benefits of controls must be weighed against their costs to the organization.
While Internal Controls are made up of specific policies and procedures, they should be thought of as an ongoing process. They need to be reevaluated and updated on a consistent basis to accommodate for internal changes such as departmental growth.
Control activities should be promoted throughout a company, from the top levels of management down to entry level positions. Each employee’s job description should include the responsibility to communicate operations problems, violations of the code of conduct, or illegal activity to their superiors immediately upon observation.
The best way to insure that errors and fraud don’t occur is to hire the right people. Bringing in employees who are competent, honest and believe in conducting themselves with integrity, is the best way for owners or managers to sleep well at night.
“The individual is the central, rarest, most precious capital resource of our society.” -Peter Drucker (1909-2005)