By Fred Croop, Ed.D.
With tax season upon us, it’s a good time to review the importance of internal accounting controls for for-profit and nonprofit entities, alike.
Internal controls, oftentimes, are the lifeblood of businesses for many reasons. Sure, they safeguard assets, but they also certify accurate financial and regulatory reporting, ensure compliance with laws and regulations and improve efficiency while reducing errors. There are costs associated with implementation, but do not fret because sound internal accounting controls will increase long-term profitability.
For large public corporations that trade their stock on the exchanges, the Sarbanes-Oxley Act requires effective controls to protect investors. Take this act seriously, as there are severe penalties for non-compliance.
Before financial institutions will approve loans, they typically require internal controls and independent audits. Nonprofits that have been approved for tax-exempt status by the IRS are required to file the annual 990-tax form, which requires responses to questions on governance. These answers reveal the implementation of internal controls by these entities to the public.
The Misericordia University accounting program has recognized the need to modify standard internal controls so they are practical and effective for volunteer organizations with no employees. Even more so is the significance they hold for sole proprietorship and very small family businesses.
A fundamental element of internal accounting controls is separation of duties between two or more office employees. Unfortunately, if a sole-owner business has only one office worker — which is very common — there is no segregation of responsibilities. This author and his auditing students have some recommendations.
The solution to this problem is for the owner to become more involved in the accounting and day-to-day financial management of the business. In many cases, that is not possible because the owner isn’t in the office because he or she is performing the services, or selling and delivering the products that generate revenue.
Many of these hard-working people also are not interested in handling paperwork. This scenario may end up up costing some small business owners dearly. Business owners usually do not discover routine bills have gone unpaid until utilities are off, insurance coverage has lapsed, suppliers have cut off credit and taxes are in arrears. More importantly, the business’ healthy balance sheet is fictitious because bank deposits were not made.
All sorts of problems can pop up because of lax controls. The lack of internal controls can cause great harm for larger businesses, but it can be fatal to ultra-small operations. For these proprietorships, paying attention to internal accounting controls becomes a matter of survival. Steps can be taken to help prevent the reoccurrences of events that have destroyed otherwise profitable and viable one-owner enterprises without overburdening the business owner.
The first order of business is to have bills, correspondence with government agencies, bank statements and payments from customers delivered to the business owner’s home or to a post office box. Open all mail and review it before giving it to the office worker for processing and recording. Owners should learn to do bank reconciliations and perform that accounting function since it is not difficult or time consuming when done on a monthly basis.
Put job activities and responsibilities in writing for the employee. Make it known that at random, unannounced times the accountant who prepares the annual tax return for the business can drop in to check on the status of the bookkeeping — making it known that even though there is not an audit, someone is watching.
Small one-owner businesses are vital to our regional economy. Taking these basic steps can reduce the possibility of financial improprieties.
Fred Croop, Ed.D., M.B.A., is an associate professor of business at Misericordia University in Dallas, the oldest four-year institution of higher education in Luzerne County.