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Prevent Embezzlement – A Check List for Establishing Internal Controls

Guest post by: Shirley Coop

Article Overview: While there is no foolproof system of accounting or internal control that will absolutely prevent employee dishonesty losses, an environment can be created where employee pilfering is discouraged. The following steps detail ways to create this environment.

Prevent Embezzlement – A Check List for Establishing Internal Controls

TIP: Because an employee who never takes a vacation could be concealing acts of dishonesty, all employees, but especially the ones who have access to your business records, should be required to take a vacation annually. There are four basic safeguards that can help you establish an internal system of controls:

• § Screen Applicants before they are hired.
• § Periodically examine canceled checks to see if there is anything unusual.
• § Take precautions in preparing payroll by having more than one person responsible for preparing it, oversee the process yourself.
• § Have two people sign off on checks, preferably in front of each other.

The first step is to review every area where potential dishonesty problems could arise, including:

• § inventory control
• § data processing
• § purchasing
• § receiving
• § bookkeeping
• § cash disbursements

The next step is setting the mechanisms in place to remove the temptations that could make an otherwise honest employee dishonest. To set up an internal audit system, it's common procedurally for most companies to divide financial responsibilities and functions so that no one employee controls all aspects of a transaction. Hence, insurers and consultants recommend the following:

• § Require checks to be countersigned by two responsible officials.
• § Limit the endorsement of checks, by anyone other than the owner, to deposits for credit only.
• § Delegate the responsibility for receiving checks and cash to someone other than the person who records incoming funds.
• § Mail statements to outside accounts directly at least monthly.
• § Examine payroll records periodically to prevent padding.
• § Make sure that employees responsible for ordering goods and supplies are not the same ones responsible for receiving them or paying for them.
• § Do not give the person who has the authority to write off bad debts the authority to make a credit sale or loan.
• § If someone else does payroll, make sure you have access to payroll data on the computer and that no one changes the passwords or access requirements for that data.

You may not be able to foolproof completely for preventing employee dishonesty, but by dividing financial responsibilities and functions, and by taking an inventory of your merchandise at least annually, youcan help to minimize and control employee theft and fraud.You may choose to also have a outside public accountant audit your cash and accounts annually.

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Article Tags: accounting, embezzlement, employee dishonesty, foolproof system, internal control, losses



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