Small Business Tips: Accounting Policies That Prevent Embezzlement

Learn how to ensure that embezzlement and mistakes are detectable and the company's money is accounted for.

Internal Control over accounting procedures is one of the most important aspects of running a business. It helps to ensure that embezzlement and mistakes are detectable and the company's money is correctly accounted for. The basic premise behind Internal Control in an accounting environment is to ensure that no one person is in a position to embezzle funds, no matter how trustworthy that person. At each stage of the accounting process, from original monetary transaction, incoming or outgoing, to documentation, to financial statements, a state of affairs prevails that ensures all procedures are monitored for validity. By segregating accounting duties, no one person is responsible for transactions that could be vulnerable to abuse.

Very small companies, of course, are not usually in a position to hire more than one bookkeeper; indeed, it would be impractical and wasteful to do so. Double entry bookkeeping is in itself a good tool for the prevention and tracking of mistakes. If the books balance and the cash account reconciles to the bank statement(s), it's a good indication that things are running smoothly. An eye should be kept on actual money coming in and the disbursement of that money. Random checks and an annual audit by a reliable outside accounting firm will be of great value.

For larger companies, some procedures are in order for Internal Accounting Control:



1. No company should allow an employed bookkeeper or accountant to have total responsibility for all monetary transactions, or the recording of those transactions.

2. Actual Cash Receipts should be recorded on the books by someone other than the person who takes physical deposits to the bank.

3. Disbursed checks should require more than one signature, and should not be signed by the same person whose responsibility it is to prepare payments.

4. Documentation is of prime importance in an accounting department. The recording of void or destroyed invoices is as important as keeping track of void check numbers. Originals, or copies, of these papers should be kept on file, in numerical order, along with valid documents. If this is impossible (a check stub or invoice physically mangled in the printer, for example), then a sheet with the number, the date, and a clear explanation of what happened should be kept. Any case of a missing check, invoice, or voucher number in the files is cause for concern.

5. Payroll is a matter for confidentiality, but more than one person in the company should have access to payroll information. Payroll tax compliance is also an area that requires monitoring.

6. Petty Cash vouchers should be signed by more than one person (perhaps above a ceiling amount), and receipts should be matched to the vouchers, which should also be numbered and filed in numerical order.

7. The bank reconciliations(s) should be handled by someone other than the persons who deal with Cash Receipts and Cash Disbursements.

All this may seem overly-cautious, but it will preclude an employee stashing incoming checks in a draw to later stamp with their own personal bank account number. It will prevent a salesperson from using unrecorded invoices to sell goods for their own personal gain. Mistakes, too, are more readily uncovered and resolved with a reliable Internal Control system in place.

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