One of the most common internal control deficiencies we find within our private company clients is a lack of segregation of duties: some combination of the roles for authorizing transactions, safeguarding assets, and reconciliation of the period’s transactions being inappropriately delegated to the same employee. We frequently see that companies from small to large have an accounting department that consists of as little as one to two individuals. The investment in hiring sufficient personnel with appropriate skillsets in your accounting department is a cost-benefit based decision and will depend on the needs of your organization. However, fewer employees involved in the accounting function will mean thinking outside the box to design controls that help separate the key roles of authorization, reconciliation, and custody. From our experience performing audits and consulting with our clients to implement and strengthen controls, we’ve come up with the following ideas you could implement at your company. 

Leverage Your Non-Accounting Team Members 

Separate whatever functions you can from the accounting department, so they involve other sets of eyes and ears. For example: 

• If accounting personnel are involved in handling customer payments, customer service personnel should be the first in line to address customers’ concerns about their account and billing to deter customer payment theft schemes. 

• Mail should be opened, and any inbound checks should be logged, by an employee such as the receptionist or office manager. The check log should be reviewed monthly by someone independent of handling the checks and compared to bank statements. 

• If the accounting team processes payroll, human resources should review the payroll prior to the payroll disbursement.  

• Beware of any conflicts of interest, such as familial relationships, between accounting personnel and personnel in other areas. If family members are hired, their access to assets, accounting and payroll platforms should be closely considered to ensure two related employees can’t circumvent controls by combining their access. 

Owner’s Oversight 

In a closely held organization, some owners might be seen at the organization on a daily basis, while others will be hands off. Regardless of their involvement in operating the business, owners can help to provide oversight in accounting to help safeguard assets and identify unusual happenings within the Company. Owners will generally need to have some financial literacy and working knowledge of the Company’s financial position to be effective. We recommend owners consider carrying out the following functions on a monthly basis: 

• Obtain bank statements directly from the online banking portal and compare them to the bank reconciliation and trial balance to ensure that cash balances match. Review the statements and reconciliations for unusual transactions each month immediately after the month end close. 

• Obtain check images from the online banking portal. Review the checks to make sure no unusual payments were made and to see that checks were signed by the appropriate employee. 

• Review the electronic disbursements shown on the bank statements for unusual activity. Compare disbursements to information recorded in the accounting system, such as the payee. 

• Obtain a report of the month’s journal entries directly from the Company’s accounting system. Review the journal entries for unusual or unexpected activity. 

• Periodically review payroll ledgers for appropriate pay rates. Compare payroll registers to payroll disbursements on the bank statements. Review the register for fictitious employees or unusual payments, such as unauthorized bonuses. 

• Pay attention to month over month trends in the income statement and the balance sheet. Ask questions and investigate when balances consistently don’t meet your expectations. 

• Ask for a cash flow projection to be prepared and compare it to future actual cash flows. Ask questions and investigate if cash flows stray from the projection. 

• Make your presence known by consistently asking questions related to operations and financial statements. Keeping the employees aware that you are tapped into the company can serve as a deterrent control. 

• Consider being a step in the disbursement process, such as the approver for dual authorization of electronic funds transfer and being responsible for exporting and uploading positive pay files for check runs. 

Contract Accountants 

In some cases, a company might find itself needing additional help in the accounting department, but this need might not rise to the level of an additional full-time employee. In such a case, it might benefit the organization to engage a contract accountant. A contract accountant might come in the form of a bookkeeper, senior, manager or even controller or CFO depending on the needs of the organization. Some organizations completely outsource their accounting to a contract accounting group, such as our branded division, ForwardSlash.  Other companies have chosen to engage our Forensic and Integrity Services group to perform random testing or specific agreed upon procedures to detect errors and identify and deter fraud. The following are some possible functions that a contract accountant could perform and recommendations for engaging a contract accountant. 

• A bookkeeper or entry level contractor may be able to help with posting accounts payable or reviewing vendor invoices and preparing the disbursement run. 

• If the company needs to provide financial statements prepared in accordance with GAAP, a contractor could be helpful in preparing complicated estimates, like the allowance for credit losses, or ensuring that transactions align with accounting standards. 

• An experienced contractor could review the monthly financial package, including any journal entries, as a layer of oversight. 

• As a form of monitoring and deterrence, an outside accountant can be engaged to periodically test disbursements and company credit card expenses. 

Recommendations and Reminders: 

• Work with the contractor to develop a scope of work prior to agreeing to engage them. 

• Management of the company will always bear the responsibility for making business decisions. 

• Engaging a contractor might be especially beneficial when there are not sufficient controls around cash disbursements and posting journal entries. 

Leverage Today’s Technology 

Technologies for business leaders and accountants are constantly evolving. Whether your workforce is centralized at a single location or disaggregated with remote personnel, technology can be harnessed to implement and improve your system of internal control. Below is a non-exhaustive list of examples that we commonly see our clients implementing as a layer of process automation and control. Note that tools we mention may have similar alternatives, and we do not advocate or endorse any of the platforms mentioned. 

• Your accounting platform should always be implemented so that users only can access those functions they need for their role. For example, if an employee is not responsible for posting journal entries, they should not have access to do so. 

• The vendor disbursement process can be streamlined using a tool such as Bill.com. When implemented properly, such tools have integrated workflows that allow authorized users to approve invoices and disbursements. These can even be used with contract accountants in the workflow chain. Platforms such as Bill.com also have integration for certain accounting systems so that information can easily be communicated to the accounting records. 

• Bill.com and other platforms provide simpler employee credit card management by using functions for receipt management and integrations with accounting systems. These tools can also have automatic controls over employees’ credit cards to enforce company expense policies. 

• If you receive a high volume of checks from customers, consider setting up a lockbox with your bank, so you can have customers send their checks directly to the bank and no employees will need to lay hands on them. 

The design of your internal control system involves a number of cost-benefit decisions. If you would like additional consultation on strengthening your company’s system of internal controls, please reach out to us for a consultation.  

Our Forensic and Integrity Services team is available to assist you with questions related to this topic. Please contact our professionals for more information at EBRADFORD@GMCO.COM.