Are Internal Controls Too Expensive?

When inquiring with small business owners about Internal Controls the answer is almost always, “we can’t afford the staff to have Internal Controls” or “we are too small to need Internal Controls”.


At the highest level Internal Control is defined as:

Systematic measures (such as reviews, checks and balances, methods and procedures) instituted by an organization to (1) conduct its business in an orderly and efficient manner, (2) safeguard its assets and resources, (3) deter and detect errors, fraud, and theft, (4) ensure accuracy and completeness of its accounting data, (5) produce reliable and timely financial and management information, and (6) ensure adherence to its policies and plans.

Very boring to the average small business owner who is occupied everyday with the demands of running a business. Because small businesses usually have active and involved management, “trusted” staff and uncomplicated procedures, the small business owner often feels as though Internal Controls are not necessary. Well tell me if you feel that way after this story.

A few months ago a friend that I work with on a Non-Profit Board called needing help. His Accountant had been out for three weeks due to a breakdown. The company experienced impressive year over year growth in this rough economy, which I thought was impressive and made me look forward to working with them.

When inquiring about the Accountants duties, trying to find the right place to jump in and get the most important things done first I became concerned. This person had complete responsibility over everything in the accounting department. She invoiced the customers, entered the bills, made the deposits, wrote the checks, “reconciled” the bank statements and credit cards and was virtually the only interface with the tax accountant. She also had the entire bank and credit card logins, as well as the ability to send eft’s. This is always concerning and unfortunately way too common.

It was not long, less than 24 hours when my concern became founded. First we found that the Accountant was paying her personal SDG&E bills along with the Company’s. Then we found that the credit card bills were not really reconciled in months, the steps were followed but entries were made to force the balance to reconcile. Next, the eft’s used to process payroll did not in fact equal the actual payroll and Petty Cash was missing. Everywhere we looked we found signs of theft and were able to accumulate over $30,000 of misappropriated funds. There was more to be found as we only went back a few months, but the owner did not want us to look anymore as they found that their insurance did not cover the employee fraud. Their Attorney also advised them that it was difficult and expensive to prosecute these cases and since the Accountant had nothing of value they would never recoup the cost.

So I ask, can you NOT afford internal controls?

e-Bookkeeping provides affordable wrap-around services to support your company’s Internal Control function. If you have questions about these services contact Diane Perusse @877-292-9684 ext 3, or diane@e-bookkeepingonline.com