What Internal Accounting Controls are Important for Small Businesses?

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The internal accounting controls that are important for small businesses will help entrepreneurs deal with everything from check fraud to employee theft. Small businesses usually only have a narrow profit margin because of competition, economic changes, rising labor costs and human resource difficulties. Small business owners must learn how to effectively handle and prevent various forms of financial fraud and crime.

Business Policies

Small business owners need to clearly communicate their accounting and ethical standards to employees through clearly written policies. These will be extremely useful when prosecuting customers and employees for illegal activities. Accounting policies should identify and warn against employee corruption, fraudulent statements and asset misappropriation. Corruption refers to employees who scheme to use their business transaction power to obtain benefits for themselves or others.

This could be an accounting assistant who reduces late payment fees for a client. Financial statement fraud involves the intentional omission or misrepresentation of financial data and account information. The previously mentioned accounting assistant may cook the books by altering financial reports to hide their guilty behaviors. Finally, asset misappropriation refers to employees or members of the public who steal products and money as well as misuse the organization’s resources.

Top Management Support

The business owner’s commitment to implementing and evaluating internal accounting controls will directly impact success or failure. Business owners who directly involve themselves in accounting activities will send strong signals to employees that ethical conduct, fraud prevention and financial statement accuracy are important. Some small business owners, especially those who lack financial knowledge and training, will tell staff that they do not want to hear about accounting details unless there are problems.

Business owners should take a personal interest in the accounting books and randomly ask to review financial reports and bookkeeping ledgers. They should quietly consult with an external accounting professional in order to highlight any serious concerns. One of the biggest deterrents to employee fraud and theft is management oversight, even if the business owner pretends to be familiar with basic concepts and practices.

Accounting Systems

Every small business should have a clearly organized accounting system, even if it is just QuickBooks software or Microsoft Excel spreadsheets. The former is best because business owners who use software like QuickBooks can determine who has access to which functional accounting areas. Accounting software like QuickBooks allows administrators to limit and deny a user’s access to certain areas. For example, it doesn’t make sense to allow the same employee to access accounts payable, accounts receivables and bank statement balances.

These software programs are the best solution because employees can easily alter and hide their criminal activities through spreadsheets, which lack adequate controls. To be fair, Microsoft Excel does allow the spreadsheet creator to track changes, deny sharing and prevent unauthorized access through passwords. Business owners who do use Excel for their basic accounting needs should use complex formulas in different spreadsheets to ensure communal data accuracy.

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There are formal internal accounting controls that are important for small businesses. The IRS offers business owners their so-called “green book,” which is a free publication that provides excellent internal control standards for business owners.

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