August 28, 2013

A common misconception about implementing internal controls over financial reporting and operations is that doing so would be overwhelming and costly. I often hear from CFO’s and management of real estate development and construction companies that implementing internal controls is not an option for them because they have a limited number of accounting staff. However, experience has proven that it is far more costly and time consuming to deal with possible legal and financial consequences of ineffective internal controls after the fact.

Internal accounting controls are the processes and procedures used by a company to ensure accurate and valid financial reporting, and which aid in receiving information in an accurate and timely manner. These controls can lead to valuable benefits such as reducing risks for occupational fraud, ensuring accurate financial reporting and increase operating efficiencies.

Internal controls fall into the following categories:

  • Preventive Controls – Preventive controls are designed to keep errors or irregularities from occurring. Many of these controls are based on the concept of segregation of duties. No employee should be in a position to both perpetrate and conceal errors or fraud in the normal course of their duties. An employee who is responsible for approving transactions should not be the one who also records the transaction or maintains the custody of the asset.
  • Detective Controls – Detective controls are designed to identify errors or irregularities that already exist. They are implemented to ensure that the preventive controls are working effectively. Examples include monthly reconciliations of bank accounts, conducting physical inventory counts and internal or external audits.
  • Monitoring Controls – Monitoring controls ensure that internal controls continue to operate effectively over time. When implemented, a company will be able to identify and correct problems on a timely basis, and produce more accurate financial information and timely financial statements. Examples of monitoring procedures include periodic evaluation of internal controls, follow-up on anomalies identified in operating reports or metrics and supervisory reviews of reconciliations.

When was the last time you evaluated your internal accounting controls and their effectiveness?
Wouldn’t you rather be proactive in addressing any weaknesses, rather than reactive?

© Clark Nuber PS and Developing News, 2013. Unauthorized use and/or duplication of this material without express and written permission from this blog’s author and/or owner is strictly prohibited. Excerpts and links may be used, provided that full and clear credit is given to Clark Nuber PS and Developing News with appropriate and specific direction to the original content.

This article contains general information only and should not be construed as accounting, business, financial, investment, legal, tax, or other professional advice or services. Before making any decision or taking any action, you should engage a qualified professional advisor.