Risk and controls for your small business

We’ve all heard the story – a small business’s accountant is caught months if not years after they started embezzling funds.  Or PAYE, UIF etc. discovered to have been paid into a personal bank account.  While large companies have entire internal audit departments to prevent and detect fraud, it is up to you as the small business owner to ensure that the business assets are protected, laws and regulations are complied with, and financial information produced is correct.  This article will cover some of the procedures or ‘internal controls’ you can put in place to prevent the worst from happening.

The accounting function: In-house? Outsource? DIY? 

The risks you are exposed to differ according to whether your business’s accounting and finance function is outsourced, performed internally by your staff or by you personally.  Having a separate accounting function gives you more time to concentrate on the core operations of your business.  However, accountants are in a position to misappropriate funds and conceal their actions unless appropriate controls are in place.  Ideally what you want is segregation of duties – ensuring that a staff member who has access to cash cannot amend the accounting records.  In addition, a level of authorisation should be in place before orders can be placed/payments are released.  Bookkeepers or clerks should not be allowed to create/delete accounts or pass journal entries.  Creditors and debtors reconciliations should be performed regularly and carefully reviewed in order to be effective.

Bank accounts (where the buck stops)

A simple yet effective internal control is regular (preferably daily) review of bank statements.  This will alert you to unauthorised transactions and be proactive in combatting fraud.  Bank reconciliations should be performed frequently to highlight where the accounting records do not add up to movements in the bank account.

Debtors (don’t finance your customers or be a victim)

You should develop and enforce an appropriate credit policy to ensure that your debtors’ balance does not spiral out of control.  ITC checks/credit references are especially important in this economic climate, where many customers are financially stressed before taking on extra credit.  Charging interest on late payment will motivate debtors to pay earlier.

Staff (the key resource to your business)

You are more vulnerable to loss if your employees are unethical or tempted to commit fraud.  Police clearances, credit checks and references help mitigate the risk of employing unsuitable staff.  Maintaining good relations with current staff members and strictly limiting cash on site further reduces the risk of fraud. Top of the list here is to instil a culture of honesty and integrity into your corporate culture, don’t be surprised if the same employee who you asked to lie to a customer begins lying to you as well.

Budgeting (the science and art of predicting the future)

Management accounts should be produced monthly to provide you with the information necessary to make effective decisions and pick up discrepancies.  Monthly/quarterly/annual budgets should be prepared and deviations from budget explained.   Budgeting is an art learnt with practice, but any budgeting is better than no budgeting at all.

Data management (you are lost without it)

Most of us have experienced that sinking feeling when we realise we’ve lost information that cannot be recovered.  A proper filing system (paper or electronic) will prevent documents from going missing.  Backups of accounting data (preferably online) are vital in the event of break-ins, power cuts and data corruption.  And of course out-of-date anti-virus software is about as useful as a pager!

Legal considerations (daunting, but ignorance is no excuse)

Adherence to laws and regulations is important to prevent costly legal claims.  However, it can be difficult to keep up with all the latest developments.  Requirements specific to small businesses will be discussed in a future article in more detail, but the general statutes include the Companies Act, the Income Tax Act, the Value Added Tax Act, Basic Conditions of Employment Act, Compensation for Occupational Injuries and Diseases Act, Consumer Protection Act, Electronic Communications and Transactions Act, Employment Equity Act, Labour Relations Act, Promotion of Access to Information Act, Skills Development Levies Act, Unemployment Insurance Act, Unemployment Insurance Contributions Act, and there may be other legislation that relates to your specific industry – good luck. It is suggested that you Google for summaries of each of the above to understand what each Act intends to govern so that you are aware of circumstances that may require you to engage with a good legal advisor.

If you want to know more about how you can protect your business from loss, speak to a qualified business advisor with experience in accounting and auditing (NB auditors understand controls) who grasp the challenges faced by small businesses.

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