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Internal controls - accounting systems and procedures - prevention of error and fraud

Accounting systems

An accounting system would normally be considered as meaning the entire process by which final financial and management accounts are produced. The use of 'final' is meant to imply 'complete and correct' year- or period-end accounts.

For many smaller businesses there may be a very limited system with sales receipts, purchase invoices and bank records. Often these records are typically passed to external accountants in order for them to produce the annual accounts.

For a large group of companies there will be systems within each company or division with much more complete and regular recording and assembling of figures into weekly and certainly monthly full management accounts -detailed P&L accounts and a balance sheet.

A large company should maintain what should correctly be called a general ledger, but which is more often called a nominal ledger. The data in the general ledger will come from, and be further analysed in, subsidiary ledgers.

Accounting records are maintained for many reasons:

- Because law says so.

- Because tax authorities require records.

- Because managers have to manage (with the aid of accurate figures).

- Because shareholders need to know what is going on and that their net assets are safe.

- Because outsiders want to know how the business is progressing and its financial status.

All are valid reasons, but the prime one (accepting of course that you must comply with relevant law) must be that it is necessary for the owners and thus executives to know the amount and proper classification of assets/ liabilities and income/expenditure.

Internal controls

The prime purpose of internal controls is to keep assets safe and not incur unnecessary liabilities or, to mirror this from a profit and loss viewpoint, to secure sales (and thus the asset - debtor or cash arising) and control costs.

In the United Kingdom and many other countries there are no specific laws that require, let alone define, the type and numbers of controls that a business should have. It is really left to the owners and directors to decide what is required for the business from the point of view of expediency, while still being appropriately compliant.

For many industries the nature and levels of control are well established. For example, in the hospitality industry there are well-established controls to ensure that all accommodation, food and liquor are paid for. An example of choices regarding levels of control and cost versus benefits is to be found in how room mini-bars are controlled:

1 A physical stock check can be undertaken daily; the customer can still argue on checkout!

2 Many hotels, particularly where labour costs are lower, will phone to have the bar stock checked at the time of checkout.

3 An alternative approach is to install mini vending machines, at a cost, but people could still argue 'I never touched it - honest'!

From experience as auditor of many clients of varying size, my view would always be to keep the control as simple as possible - that way, you are more likely to make those controls that do exist work effectively.

 
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