Internal controls are a system of processes and procedures an organization has to ensure a business runs effectively and efficiently. These processes protect businesses by providing reliable data, safeguarding assets, and preventing fraud. Adequate internal controls also provide a roadmap for employees and mitigate risks. Here is a case study on how Froehling Anderson helped a client establish proper internal controls to give the business owners peace of mind on their financial data.
Background
The business owners of a professional service company came to us with a few concerns regarding their accounting operations. Over three decades the company had grown into a large company. The company employed three internal accountants, however, the owners felt unsure about the adequacy of the accounting records.
Identification of issues
Froehling Anderson set up a meeting with the owners to discuss their concerns and goals to identify the needs of the company. From this discussion, the following major items were identified.
- Cash
The company allowed customers to pay for their services in a variety of ways including being invoiced monthly, paying at the time of services with cash or a check, or they could come into the company’s office and pay their balance due. Cash disbursements were being made by the accountant as needed. When bills would come in, the accountant would pay them. Both cash receipts and disbursements had minimal oversight.
- Credit Cards
The company had eleven credit cards that were held by employees and owners. The cards are used for things like fuel, oil, supplies, parking, and other expenses. The credit card charges were not recorded in a standard formant in the general ledger. The credit card bills were paid by the accountant each month as the bills became due.
- Accounting operations
The owners of the company were not receiving timely financial information. There were no formal processes around closing the books each month including reconciliations, timing, and review. In addition, the general ledger consisted of over 250 accounts, was difficult to read, and was providing too much irrelevant information. Even though the company employed three full-time accountants, there were not any formal job descriptions, titles, or documented responsibilities.
Actions Taken
After this initial meeting where the owners’ concerns were identified, the Froehling team designed a plan to investigate the owners concerns by going onsite and interviewing the accountants, reviewing the accountants’ practices and procedures, and evaluating the internal controls around the three major accounting functions identified above. The onsite assessment allows Froehling Anderson to do a deep dive into the accounting department and understand the operations.
Solutions Provided for the Accounting Department
At the conclusion of our engagement, Froehling Anderson prepared a report and presentation for the company’s owners to discuss our findings and suggestions. A summary of the findings and suggestions are presented below.
Cash:
- Establish segregation of duties around cash receipts and disbursements. Separate people should be involved in receiving, depositing, and recording cash receipts.
- Pre‐numbered, blank checks should be stored in a locked cabinet that both the owner and one accountant have access.
- A review of the bank reconciliations should be done monthly. The reviewer should be an owner or person of management at the company.
- Checks should be prepared by the accountant and submitted for signature to a designated person. The checks should have a copy of the backup support for what is being paid. The person who prepares checks for signing should not have the ability to sign the checks.
- Implementing a dollar threshold that would require a second signer/approver.
- Implementation of a Positive Pay service and dual control for wires.
- Implementation of a vendor approval process.
Credit Cards:
- Formalize a credit policy for internal users.
- Original receipts are required to be presented to the accounting department for all charges.
- Statements and charges should be reviewed by someone who does not have possession of a company credit card.
Accounting operations:
- Job descriptions should be created for each accounting position.
- Policies and procedures should be documented to ensure consistency and assist in cross training. These procedures should include a month end close checklist and a financial statement reporting package for the owners. The procedures should list the person responsible for the task and as it relates to month end, a due date for when the financial package needs to be received by the owners.
- Any journal entries should be supported by documentation and reviewed and signed off by an approver.
- A suggested general ledger of accounts was presented and discussed along with standardization policies for recording expenses.
- Accounting software was analyzed and suggestions for improvement provided.
- Accounting personnel workload was analyzed and alternative solutions were provided.
Conclusion
The business owners implemented the majority of Froehling Anderson’s solutions and received more timely, concise, and accurate financial information giving them peace of mind. The owners felt more confident in their decisions because they had a better grasp on their financial position. In addition, roles were defined, and increased efficiencies were gained, and the business owners came to the conclusion that they didn’t need three accountants to accomplish the workload in that department.
If you are receiving delayed, inaccurate, or incomplete financial information from your company or have questions on your internal accounting processes, policies and procedures, contact Froehling Anderson today.
