Small businesses (fewer than 100 employees) lose relatively more to employee fraud than larger business do. About 87% of embezzlers are first time offenders. Nearly every one is a trusted employee. That is (in 31 words) why you need to improve the internal controls at your business.
Segregation of duties is one of the most effective means of reducing employee fraud. You should separate the following responsibilities in each business process:
• Custody of assets
• Record keeping
• Authorization
• Reconciliation
In this article we discuss controls over the Cash Receipts business cycle.
The person who receives customer payments should record the payments either in a cash register, on a deposit slip, or in a receipts log. This person should not be able to record or authorize transactions in the accounts receivable ledger or customer accounts. In addition, this person should not be allowed to record cash transactions or prepare the bank reconciliation.
Adjustments and write-offs to customer accounts should be reviewed and approved by an employee who is not able to record these transactions. In addition, this person should not be allowed to reconcile the accounts receivable subsidiary ledger to the general ledger.
Employees responsible for recording adjustments to customer accounts should not process customer payments or prepare the bank deposit.
The bank accounts should be reconciled by someone who is not able to record cash receipts or disbursements. Bank reconciliations should be reviewed and approved by someone other than the preparer.
When duties cannot be segregated, compensating controls should be used. For example, two employees, working together, could receive and open customer payments and prepare the bank deposit.
Roth&Co is ready and willing to help you design and implement a better internal control system. For further discussion or a specific proposal, please reach out.
