What Does Good Accounting Control Mean? What Are They?

Accounting controls are procedures used to ensure that the accounting system works accurately and reliably to identify, classify, record and report the company’s business activities, assets, and liabilities. They are control measures that revolve around one of the core components in the overall internal control system: the accounting system. Good accounting controls not only help a business to reduce the risk of error or losing vital documents; they can deter frauds and embezzlement, and also give you a better feel for the progress of your business.

Regardless of the hardware and accounting software you choose for your accounting system, they should equip with the capabilities to help you implement the following control procedures:

·        Set up authorization verification at various activities level so that all business transactions are executed in accordance with management’s general or specific authorization.

·        Establish standards and integrity for data entry so that transactions are recorded as necessary to :

1. Permit the preparation of financial statements in conformity with generally accepted accounting principles or any other criteria applicable to such statements; and  

·        Perform periodic comparison of the recorded accounts of assets with their physical existence and take appropriate action with respect to any differences.

Process of Establishing Good Accounting Controls

·        Examine your business both from the inside out and the outside in to identify various threats that can undermine your business operation to result in loss of productivity or profitability. Wasteful and inefficient use of resources is an example of a threat. Other examples of threats include unintentional errors in recording or processing data, and loss of assets through employee frauds. While you can’t possibly list all the threats your business may face, you should know your business enough to identify the ones that will have a major impact on your business.

·        After acknowledging what can be threatening to your business, you should determine the level of risk that your business is susceptible to each of these threats. The level of risk is considered to be high if there is little or no measure to mitigate a threat, and that it’s very likely for your business to suffer a loss as a result. On the other hand, the level of risk is considered to be low if there are adequate measures in place to protect your business against a threat, or to minimize the loss should it become unavoidable.

·        Now, targeting each of the high risk areas you identified above, you can design an accounting control system to reduce the risks in such areas. An effective accounting control system should include the following:

1. A plan for the segregation of duties among personnel.

Elements of Your Business That Need Controls

The limitation in financial and human resources is the greatest challenge for small business owners to achieve effective accounting control. As a rule of thumb, no accounting control procedure should cost more than the loss it is trying to prevent. Below are some key elements common to small businesses that a cost effective control system often emphasizes.

Cash

All cash receipts for your business should be promptly deposited and kept under adequate security by one designated party, and then properly recorded and reconciled by a different party (e.g. the bookkeeper). All cash disbursements have to be authorized by management for valid business purposes, and have to be properly recorded. Petty cash should only be used for proper purposes, and should be vouchered, properly recorded, and safeguarded.

Payroll

Payroll disbursements should be authorized to be made only to bona fide employees for the correct contracted salaries or hours worked. Payroll should be properly recorded with an assurance that all related legal requirements (such as payroll taxes withholdings) are complied with.

Sales

A pre-numbered sales receipt has to be generated with each sale. For cash and credit card sales, cash register totals have to match pre-numbered sales receipts totals and daily cash count. For sales on account, corresponding receivables have to be recorded properly in accordance with the sales receipts by someone who isn’t authorized to sell, e.g., the bookkeeper. The numbers on the sales receipts should be in sequence. All missing receipts have to be properly accounted for.

Purchases

All purchases have to be made with pre-numbered purchase orders. Before an authorization of an invoice for payment (and the recording of an accounts payable), purchase orders should be approved with vendors verified, matched with receiving reports regarding purchase information, price, and quantity.

Accounts Payable

To avoid illegal insertion of nonexistent vendors and payment of false invoices, accounts payable should be monitored separately for payment authorization, disbursement, and accounting. Paid invoices should be cancelled with a “PAID” stamp and should be properly accounted for.

Inventory

The physical flow of inventory throughout the company should be monitored and documented. Physical counts of inventory should be conducted periodically and be compared to the records in the accounting system for discrepancy.

Fixed Assets

Fixed assets should only be acquired and disposed of with proper authorization. They should be adequately safeguarded and properly recorded.

Do it Yourself or Hire a Professional

If your business has a relatively small and simple structure, a good computer and off-the-shelf accounting software can help you set up controls for the few high risk areas that matter. Depending on your understanding of accounting, good accounting software can guide you step by step in setting up an adequate control system. If you have weak accounting skills, you can use a book-keeper to assist you in configuring the control capabilities of the accounting software in accordance with your knowledge of the key control areas in your business.

If your business involves high volume activities, has a complex structure, or is subject to more government regulations, then you will need an experienced Certified Public Accountant (CPA) to design and set up the control system for you.

Implementation How-to

Once an accounting control system is set up, it should be enforced consistently and diligently to effectively mitigate risks. The system must be periodically evaluated for its success in meeting control objectives. Finally, accounting control is an ongoing process, and it must be constantly reviewed and updated as your business and its environment change. HBM

Olivia Pun, CPA, Starr Judson & Co., LLP,

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