Is “trust” your only internal control?

In today’s world, organizations must consider the strength of their internal controls more than ever.  It is important to periodically review your internal controls to ensure that they are well-designed and operating effectively.  To determine if your system is well designed, take a particular type of transaction and trace it from its origin to its ultimate conclusion, asking yourself, “What could go wrong with this system?”  To evaluate the operating effectiveness, ask the various personnel involved in processing the transaction how they perform the various tasks, and watch them actually do the work.  You will be better able to determine if they are following the appropriate procedures.

When going throught this review, it is important to take the “person” out of the control and ask yourself, “If I had an unknown person performing this taks, would I be concerned?”  Because of the very nature of the types of services that most not-for-profits provide, they tend to hire caring, trustworthy individuals to perform various tasks.  While trust is certainly a needed attribute to have in an employee, it cannot serve as your only internal control.  If you also believe that an employee would never do anything wrong, you may be under a false sense of security.  We usually suggest to our clients that the internal controls be designed in such a way that it eliminates the opportunity for an employee to commit fraud.  This design not only can protect you, but the employee as well.

A key component of a well-designed internal control system is segregation of duties.  Proper segregation also helps to eliminate the opportunity to make errors or commit fraud.  To create proper segregation, the following tasks should be performed by different personnel:

• Authority (approving purchases, writing off bad debt, authorizing salary increases, approving new vendors)
• Custody (ability to write checks, make bank deposits, process cash receipts, manage inventory, make electronic withdrawals from bank and investment accounts )
• Recordkeeping (posting transactions to the general ledger, recording receivables and payables)

Need help in segregating functions or duties. Contact me.