What is internal control?  How does it affect your business?  Internal controls or internal checks and balances in companies are extremely important to safeguard your assets such as cash and ensuring accurate and reliable financial accounting reporting.

One component of internal controls consists of segregation of accounting duties. For example, if a company has one person who is able to 1) create a new vendor in the accounting system, 2) process invoices, 3) prepare checks, 4) sign checks, 5) record the checks in the accounting system and 6) perform monthly bank reconciliations, there is a lack of segregation of duties.  The risk of embezzlement is very real and present.  In this case, there are no controls relating to the disbursements of cash.

In order to mitigate this risk, a prudent business would segregate the duties identified above between two or more people.  The objective of this is to create gaps throughout the entire transaction cycle (in this case cash disbursements) and prevent one person from executing all of the necessary steps from “cradle-to-grave” without anyone else taking notice or having oversight. Segregation of duties provides a way to monitor outgoing cash disbursements and to ensure a company’s lifeline-cash is safeguarded.

For more of this story by Ben Pena, visit the “Current & Past Issues” tab or pick up a copy of Valley Business Report’s September 2014 print edition.