Tips to Improve Internal Controls

Maintaining proper controls over your inventory can be challenging especially if you have no controls in place. Think about when was the last time you conducted an inventory check, if an employee was committing fraud, would you able to identify how? Having strong internal controls is essential to help with the prevention of theft and minimizing errors. Having proper internal controls is not always easy, especially if you have a small business; however, the following are some simple policies that can be implemented to improve your controls and help eliminate some risk regarding your inventory.

Segregation of Duties

Segregation of duties (SOD) is defined as a basic building block for sustainable risk management based on the distribution of key responsibilities to more than one person in a certain department. SOD can be implemented on an upper management level and lower level employees. The important aspect is that no one person has too much control or access to commit fraud. SOD is a critical function to help minimize errors and fraud. It is important to try and segregate the following duties:

1. Purchasing – Purchases should be serially numbered. Properly approved purchase orders should be prepared and issued to the accounting and receiving departments.
2. Receiving – The sole responsibility of the receiving department should be the receipt of goods. A copy of the purchase order should be given to the receiving department but it should not indicate the quantity ordered. The receiving department is responsible for verifying the quantities received, detection of damaged goods, preparing the receiving report and delivering the goods to the warehouse.
3. Warehouse – The warehouse is the custodian for the goods received that have been verified.
4. Shipping – After authorization, the shipping department is responsible for the shipment of goods.

Adequate Safeguard

Having a well-designed internal control system to protect inventory for accidental loss or fraud is important. Most businesses keep their inventory in a central location which allows them to securely monitor their assets. It is important to try:

1. Fence and lock the warehouse – One of the most important inventory controls is locking down the warehouse. This can be accomplished by simply installing a fence around your inventory, locking the gate, and only allowing authorized personnel into the warehouse. Giving different employees with restricted accesses will allow you to minimize theft. For instance, if you only allow upper management employees to have the access codes, each with their own special code, will help you identify who is entering the warehouse and at what time. Even if there was fraud you would know which manager was responsible based on the code that was used to enter into the building.

2. Security Camera – When employees know that someone is watching their every move they are more likely not tempted to commit theft because the risk of being caught is significantly greater.

Increase in Oversight

Increasing or establishing proper oversight is a key function to maintain a thriving business. By implementing controls that require management to check in and review an employee’s work it could minimize the risk for both error and fraud.

1. Evaluate who orders what and when – Providing oversight over ordering controls is important. Many businesses use e-commerce which makes it easier for employees and customers but it also gives an employee the opportunity to commit fraud if not monitored correctly. It is important to have managers or supervisors review and approve all orders. If an employee knows that someone will be reviewing their work on a daily or weekly basis the risk of error or fraud can be minimized.

Rotation of Employee Job Assignments

Do you have a current employee that has been working the same position for 10 or 20 years? If so, ask yourself when was the last time they took a vacation or used sick leave? Many employers have employees that fall into this category and do not even realize that they could be stealing from the company. By implementing monthly or quarterly re-assignments, will not only allow you to minimize the chance of fraud but also allows you to have well rounded employees that can work multiple positions if needed.

1. Rotation of employee job assignments / Mandatory Vacations –The rotation of job assignments and mandatory vacations will discourage employees from engaging in long-term schemes to steal. Employees might be less likely to steal knowing that another employee will be assigned to their position and could discover the theft.

These policies are very simple, but essential to help minimize fraudulent activities and errors if implemented correctly. Remember that checks and balances are the keys to a thriving business. The best controls to focus on are segregation of duties and increasing proper oversight. By delegating and restricting tasks to specific employees and having management supervising it will help reduce the risk of fraud and improve the detection of errors. Developing controls is the easy part, making sure your management team implements and enforces these policies can be difficult.