Business Owners Must Put in Time and Attention to Monitor Accounts

Key Takeaways:
  • Implementing proper internal controls is important to preventing workplace fraud, which can lead to devastating financial losses.
  • Owners and executives must actively review financial statements, segregate duties and monitor all payment platforms to catch red flags early.
  • A lack of  internal controls not only risks immediate monetary theft but also jeopardizes future financing opportunities.

 

Small and medium-sized businesses always perform a balancing act when it comes to implementing effective internal financial controls. Balancing cost, time and effort to put together the most effective controls is critical to reducing the risk of accidental or fraudulent financial losses. It’s also difficult, particularly during a severe labor shortage that makes hiring qualified finance staff seem impossible. 

Many companies are trying to get by with shorter finance staffing, but that gives rise to a different problem that is rising among small and medium-sized companies – increasing incidents of workplace theft. 

No owner wants to think their employees would steal from them, but it happens. A 2024 study by the Association of Certified Fraud Examiners (ACFE) found that organizations that were victims of occupational fraud, on average, suffered financial losses equal to about 5% of their revenues. 

Perhaps most importantly, the study found that more than half of workplace theft occurred as a result of weak internal controls or instances of internal controls being overridden. 

Why Internal Controls are Important 

If you don’t have enough staff to implement the best internal control practices, you may need to figure out alternative measures that would be equally effective. Taking the attitude that “It would never happen at my company” is the equivalent of hiding your head in the sand. Of course, you trust your employees, especially those who have been with you for many years. But you have a company to run, and running it means putting safeguards in place that will protect the company – and you – for the long term. 

What Internal Controls Help Prevent Fraud? 

Following is a summary of the internal control measures every company should have in place: 

  • Reconciling bank accounts – Reconciliation ensures that the actual amount of money spent matches the amount shown leaving an account at the end of the month. The person who writes checks should not also reconcile the checking account at the end of the month, and the same is true of credit card expenses and statements. Dividing these functions between two or more people is known as segregation of duties, and is a critical practice to combat workplace theft. 
  • Access to accounts – Does one person have complete access to the company’s cash and/or bank accounts, as well as responsibility for providing financial information to the CEO without involvement of anyone else? Again, the concentration of access to accounts with no oversight heightens the possibility of workplace theft, particularly if the CEO is not involved with financial management. 
  • Review of outgoing checks – All checks should either require two signatures or review by a second person, and should be matched up to an invoice or bill they are meant to pay. A common form of workplace theft occurs when an employee writes checks coded to a legitimate vendor, but deposits them in a personal account. 
  • Review of bank statements – The CEO or CFO should be reviewing monthly statements from every bank the company has accounts with in a timely manner. Yes, it’s time consuming. But it can also yield important information if an unusual number of checks are written to a vendor you haven’t done much business with lately. This is one of the most important fraud prevention measures that many business owners skip because of the time commitment. If you see a check written for an unusual amount to a known vendor, ask for the details behind the transaction. 
  • Review of credit card accounts and statements – Is there anyone in the company who has the authority to obtain new credit cards with no oversight? And are all credit card statements reviewed by the CEO or CFO? Unusual expenses for items like personal or household goods, non-business travel and vacations are red flags that can go on for months or years if the proper review of statements is not taking place. 
  • Monitor key performance indicators (KPIs) – All business owners should be monitoring KPIs to ascertain how their companies’ performance. But regular monitoring also can highlight red flags that could indicate workplace theft. Are your accounts receivable growing at an unusual rate? This could indicate that someone is diverting deposits to a personal account. Are the company’s margins shrinking even though business is good and you’ve reined in expenses? Are your overhead costs growing with no explanation? Any unusual changes in KPI metrics should be investigated. It requires discipline to regularly monitor KPIs and all financials. 
  • Digital payment options – With varying payment options proliferating – such as digital payment platforms like Venmo, Zelle and PayPal – in addition to the traditional cash, check and credit card payments you are used to, are you actively monitoring all of the accounts? Aside from the potential for fraud, these accounts offer accounting and bookkeeping challenges. If a PayPal account was closed three months ago, but your controller inadvertently left $7,000 sitting in it, why was the cash never transferred to your bank? And has it been accounted for in the books? Moreover, as with credit cards, does anyone in your company have authority to set up digital payment accounts for the business? If so, who has the login credentials? And are the accounts monitored at least monthly for all debits and credits? Too often, company owners who don’t understand digital payment platforms delegate authority to an employee to set them up and manage them. But if that employee leaves the company or is terminated, they still have the login credentials and access to customer payments. Every company that accepts digital payment options should have policies governing login credentials and access to the accounts. 

The Stakes are High 

The stakes are high for your company if internal controls don’t protect you from workplace fraud. Not only do you stand to lose money in the short term, you also could lose financing in the long term, as well. During times of high interest rates and inflation, banks typically take a closer look at the financials of their business customers. If they find an irregularity in your financials before you do, it could have long-term consequences on your borrowing ability. 

If you would like an independent review of your internal financial controls, contact an Adams Brown advisor.