All companies need an accounting system to function properly.
Accounting systems, with accountants, function to track revenue and expenses, draw up budgets, maintain compliance, and evaluate the company’s performance. But companies need internal controls, even if they have competent accounting systems and accountants, as internal controls function to systemise processes and transactions, identify errors and pre-empt fraud.
What are internal controls?
Internal accounting controls come in a range of different forms depending on a business’ activities, but all ensure the integrity of the company’s financial statements. Internal control measures can be implemented and governed by senior management in the company, or by a third party. There are three different types of internal controls, namely detective, preventive, and corrective.
A detective internal control focuses on finding an error or fraudulent activity within accounting and business processes and systems. This allows the business to find errors or fraud in its early stages before it can cause major or long-lasting effects. Examples of detective internal controls are inventory counts, internal audits, and reconciliations.
A preventative internal control focuses on preventing any accounting errors or fraudulent activity. Examples of preventative internal controls are the separation of duties, double-entry accounting systems, and controlled access within the accounting system.
A corrective internal control begins functioning once the detective internal control locates an error or fraud. As the name suggests, this internal control corrects errors and ensures prevention of it in the future. Examples of corrective internal controls are physical audits, adjustments in the accounting system, and ledger verification.
The Most Common Internal Controls
The five most common internal controls measures are:
Separation of duties
Separation, or segregation, of duties is necessary to ensure that no one involved in accounting has enough information or power to be the cause of errors in transactions or to commit fraud. Duties can be separated by requiring authorization when recording and approving transactions, preparing financial statements, and approving invoices to name a few. The company could also practice separation of duties by rotating the duties amongst the employees and managers after a certain amount of time. This would ensure that not one employee is able to operate autonomously. While this may not be possible in smaller businesses, we do assist in making sure that you are asking the right questions in terms of allocating duties to yourself and to your staff.
Restriction of access
This internal control requires access to the company’s accounting systems need to be restricted to ensure that employees or managers of the company cannot change information or commit fraud. Restriction of access is also for certain physical locations in the business, depending on what the business activities are.
Reconciliations
Reconciliations, done regularly often, are used to ensure that all account balances in the accounting system correlate with the balances of the independent accounts. Accounts, transactions, and business activities would need to be reconciled. If there are differences between the account balances in the accounting system and the independent accounts, there is an error in the system or fraud was committed and these would require the right level of follow up.
Standardisation
Another internal control would be standardizing accounting documents and approvals. Accounting documents, like inventory receipts, purchase orders, vendor invoices, etc., offer consistency and will reveal errors or fraud. This also helps the company during auditing as the auditor is able to easily review and compare past financial records.
Corporate Governance and Internal Control Services offered by PSTM
PSTM offers the service to design, evaluate, and implement internal control measures. They also offer corporate governance advisory. Corporate governance offers the managers and board members of a company the tools needed to run the company smoother and more effectively. It also ensures that there is balance within the company. Decision-making processes and controls will be put in place to ensure that the interests of all the stakeholders involved in the business are balanced.
Protect your company with the services of PSTM
If your company does not have internal controls or needs its internal controls refreshed and re-evaluated, PSTM is the answer you need. PSTM is a black female-owned and managed led firm focused on the assurance, tax, and advisory space. The team of chartered accountants is sure to help you with any of your internal control needs. Get into contact with PTSM at +27 11 656 0061 or info@pstmco.co.za.
