Date Posted: 5/5/2004
Accounting Software: Maintaining Control
What are controls? According to the Webster Dictionary control is to “to check, test, or verify by evidence or experiments”. Accounting controls help to insure that your accounting records and financial data are accurate. The idea of accounting controls is not new. Accounting controls were well established and integrated into the many of the manual systems used in the financial world; however, with the transition to computerized systems human assumptions and compromise have slipped in to procedures. The methods of controlling computerized systems, in many cases, are just updated versions of what has always been done. Certainly computers reduce some of the human errors such as in addition; however, they also introduce new items such as software bugs that create misappropriating of entered data. A more appropriate definition of accounting controls is retrieved from a classic Accounting textbook. The Internal Control System is
"defined as a process, established by an entity's board of directors, management, and other personnel, designed to provide reasonable assurance that objectives are achieved with respect to:
1. The effectiveness and efficiency of the operations of the organization.
2. The reliability of the organization's financial reporting.
3. The organization's compliance with applicable laws and regulations." 1
1Marshall (2003) Accounting: What the Numbers Mean, Sixth Edition Text [University of Phoenix Custom Edition e-text]. The McGraw-Hill Companies. University of Phoenix, Resource, ACC/529-Accounting for Managerial Decision Making
One of the targets for control is both human and computer errors. Errors are the most common type of problem likely to be encountered. Errors can also be one of the most difficult to control as that perception of existence is impacted by the human assumptions that the computer is always correct. If an invoice is put in for payment and a check is produced, signed and sent on the right day, then it is easy to assume that the next check produced will follow the same pattern. Errors do not follow patterns and humans do occasionally pay a vendor more than once, computer power problems can impact reliability and we all know about bugs. Control not only captures errors, but also establishes ethical procedures for correcting those errors. A company where the controller accumulates extra customer payments and uses this money to fund Christmas parties is not a system that would be officially recognized. More scrupulous vendors notify the customer of double payments, but this does cause real expense for both parties as each must invest in fixing the problem.
Without good controls you also have an environment where mistakes and disorganization encourages criminal activity. We have all seen the news reports about top executives stealing or misusing company funds and we must realize that this problem does not only apply to large companies. People are stealing from small companies, large companies, non-profits and even local governments. It’s happening all around us.
Computers and Accounting Software do not eliminate the need for controls, a basic area that people still seem to misunderstand. What if you have controls in place? You must then ask yourself are these controls independent and accurate? The important thing is that the controls have to be independent of the accounting software. There is no problem with maintaining the controls on the same computer or network as long as the accounting software isn’t feeding the control.
What does this mean in real terms? Let’s say you are using accounting system XYZ Software. It handles all of the financial data and accounting for your company. If you decide to run your controls using a spreadsheet software package, such as Microsoft Excel then there is no conflict as long as the source data you are retrieving is independent of the XYZ Software product. Why? You are manually entering the amounts into the spreadsheet from somewhere other than the accounting system and there is no connection between the two. Controls remain valid if the data being compared is independently retrieved and entered using two different systems.
Control of Cash
Cash is one of the big issues. It is something anybody can use, and a huge portion of the transactions in an accounting system involve cash.
One of the controls you can maintain is to keep a running balance for each cash account. This is a sample spreadsheet of that type of control:
Payroll Checking Account
Payroll checks cut
What else can you do? A lot of banks offer on-line services or faxes to tell you the daily status of your accounts. If you receive these daily postings from the bank, you can reconcile your daily cash deposit balance in the XYZ Software to the daily cash deposits in the bank. You may want to reconcile every day, but this is a lot of work. Another option is to review these daily deposits occasionally.
What do you look for? The first item to check is the ATM and debit card transactions. Make sure that these transactions have been recorded. Can you think of anyone in your company that has access to a debit card who doesn’t record every transaction? I bet you can! Scan the daily report for anything that looks out of line. This is where your experience comes in. If there is supposed to be a deposit every day, is it there?
Separation of Duties
The most basic rule from both the manual world and today is separation of duties. The person who reconciles the checking account does not have the right to sign checks or have access to blank checks. This can be considered common sense, but in the world of the small company the task of separation of duties is much harder! Is your organization too small? There are other creative methods for insuring separation of duties. For instance, consider having your CPA do it. You can also implement a policy that requires customers to send checks with a signature required receipt on them to insure that checks were not lost in the mail OR you could provide a Federal Express number to your large accounts which would insure tracking and signing for large checks. There are also direct deposit options and wire transfers. Additionally many accounting systems today can send an e-mail of receipt either to management or back to the client. When it comes to cash checks and balances and the creative and flexible business there are many things that can be done to reduce the risk of theft.
You can establish a spreadsheet control just like you did for cash (each line would be the prior balance – payments –adjustments - discounts + new charges.) Make sure that your payments are the same amounts that you have in your cash controls.
Another area that you might monitor would be customer feedback. When you monitor customer feedback you know if there is an ongoing problem. Computer systems can send the client a quick e-mail, when a deposit is made. The client then gets comfortable receiving said e-mails. If they send a check and are not alerted they might be prompted to call. Technology can also be used to increase the levels of checks and balances and to help reduce human error or human mischief.
Also take the time to make sure that that your accounts receivable balance always matches the balance in your general ledger accounts receivable account. Discrepancies between the two are very difficult to find, especially if they are long-standing.
Do you want good solid accounts payable? There is one sure-fire method to cut out a lot of problems. Make sure that all of the documentation is available when the checks are signed. Make sure that there is the original invoice, a purchase order and a proof of receipt of what you are paying for.
Why is this so important? If an invoice is missing, it may be that it was entered twice in the system. If there is no purchase order, the invoice may not be legitimate. This may be because an authorized person ordered something, or a vendor is sending a bogus invoice (why do you need 40 cases of toner for the copier?) If there is no receiving document, perhaps the merchandise never arrived.
Additionally most remittance advices that you receive for paying bills now have a place on them for you to fill-in how much you are paying on the bill. If customers fill in this amount then this helps to get the correct amount to the correct account by hindering the poster from using another amount and posting some to another place.
One Technique, the A/P Tickler system
One technique that can be deployed and that works well is an Accounts Payable tickler file. This is very easy to do. Set up 31 folders corresponding to each day of the month and one folder for each month. When you have entered a new invoice into the payables system, file it on the day it is due. If it is to be paid during the current month, put it into the folder for the day it is to be paid. If it is to be paid in a future month, put it in that month’s folder. At the beginning of the month, move the items for the new month into the numbered folders
When you go to pay the bills, for instance from the 15th through the 19th, just take the folders numbered 15 to 19 and print the checks due on those days. Make sure that the checks match the documentation. If they do, then you are fine. If there is documentation without the check, the invoice may have been missed or entered incorrectly. If you have a check and no paperwork, check for a duplicate check or a duplicate entry of the same invoice.
Other Items to Check
There are a few other items and procedures that help with payables. One is to know the habits of your vendors. For example, if a vendor sends a pink packing list and a green invoice, make sure you are only paying the invoice and not the packing list and double check for reasonableness. Errors are costly. For instance, recently an employee of a local company was in collusion with a supplier. The supplier had inflated invoices for the quantities received by the company. The employee and the vendor split the amount of the over billing. A reasonableness test and verification of the receiving documents may have been able to catch this scam early.
Payables are an area where the company is passing out money. Make sure that you are only passing out what is owed.
The basics are the key here. Total your time cards. Do they equal what you have entered? Check your paychecks and make sure they are reasonable. Should the person in shipping have received $600.00 or $60,000.00? Is the total net payroll within the normal range?
Keep a tax calendar and check it often. A lot of companies get penalized for getting deposits or returns in late because they just missed the deadline.
People often like tracking inventory less than recreational root canals. As much as possible don’t try to do inventory all at once. Take partial inventories on a schedule. You might, for example, inventory the first 5 rows in a warehouse every January. If your physical inventory typically runs close to what the computer book inventory says, you may just be able to count those items every six months or year. If your inventory has a lot of shrinkage, this will at least give you a better picture of what your true inventory is. In any case you are also spreading the adjustments throughout your year. This means that you won’t have one month that is distorted due to a lot of inventory adjustments. Also, don’t forget that the 50 widgets in the storage shed in the backyard are part of the inventory. Just because they are not in the main warehouse, does not mean that are not part of the total inventory.
Another area of control over inventory is physical security. Make sure that your inventory is secured against theft.
Creative Approaches to Control
Other more creative approaches to reducing fraud might include assigning responsibility to the customer account manager for the cash flow of an account with the reconciliation and review being done by the Accounting Department. The account manager gets a notice that the client has sent a check and would then talk with the accounting department about being alerted when that check was posted. This would allow the account manager an opportunity to follow-up on perhaps more orders or a thank you card.
Many banks require two week vacation periods for their employees. Why? While the employee is out for the two weeks, the substitute personnel may be able to find out if there is any fraud on the vacationing individual's part. Consider using accounting personal vacations as a pro-active approach to double checking work. This does not have to be a negative process!
Is your company a non-profit or extremely small? Some companies can benefit from an outside bookkeeping company for control purposes. Non-profit organizations in particular can end up with numerous “volunteers” performing accounting tasks. An outside vendor can help with internal controls.
Numerous controls exist within organization. Some of the controls are unique to the individual organization and some are widely adopted. The whole concept of control over your accounting system helps to insure that you reap the profits that are deserved and reduce the risk of mistakes that can cause so much trouble. You want to give management the tools to see what is going on so they can make good business decisions and to keep the financial aspects of the company working. If those figures are unreliable, they cannot do their job. Even worse, you may be violating stockholder trusts (or other trusts if that is part of your business). You may even be open to criminal prosecution. Or, as an old boss of mine used to say “look out that window; you can see the unemployment office from here.”
Joel Eisenhandler is a computer consultant who works with small and medium size businesses in Albany, NY. The company website is http://www.eisenhandler.com/ and he can be reached by sending e-mail to firstname.lastname@example.org
Anne Stanton is the president of The Norwich Group, a national consulting firm specializing in higher technology utilization and business development for accounting and consulting firms. The Norwich Group websites are http://thenorwichgroup.blogs.com and http://www.thenorwichgroup.com Anne can be reached at email@example.com
By Joel Eisenhandler, Computer Consultant, and Anne Stanton, President, The Norwich Group