Unintended Consequences

Good decisions for significant matters take into account all angles, even arguing from other points of view.

Adding to this process of making good decisions, Entrepreneurs should also weigh unintended consequences of their decisions. Did you evaluate, at least for significant issues, potential unintended consequences?

Take an example of developing an incentive program. If you have developed a program that correlates high performance with high reward, it is of course your intended consequence. But, what about unintended consequences of employees cheating or manipulating the system to obtain higher compensation? How have you protected the company against such unintended consequences?

When making crucial decisions consider potential unintended consequences and implement appropriate internal controls.

Ravi Patel

 

Internal Controls over Payroll

Payroll costs are a significant cost for most Entrepreneurs. What type of internal controls have you established over the entire payroll processing process?

Some of the questions to ask – who sets up new employees, how are pay rates established and changed, who approves hours worked, is there a process to authorize overtime, who reviews payroll, is payroll reconciled, how are paychecks distributed?

Establishing internal controls over payroll processing is necessary to control this significant cost area.

Ravi Patel

www.patelCFOservices.com

Levels of Spending Authority

When Entrepreneurs start the company, they often control the spending authority such that all expenditures have to be approved by them.

As the company grows and competent leaders and managers are in place, the Entrepreneur/CEO needs to delegate the spending authority to the secondary levels in the organization.

Depending upon the size of the company, use careful thought in establishing the level of spending authority at each level. Purchase orders should be issued only upon the approval of the requisitions by the proper level of authority for the amounts to be expended.

Internal controls in this area are important for growth.

Ravi Patel

www.patelCFOservices.com

Warning Signs

Entrepreneurs, are you faced with any of these situations in your company?

Employees do not take time off; changes in lifestyle of employees; living beyond their means; possessive of their work; missing documents; books out of balance; delayed deposits; records not organized; duplicate payments; payments to same individuals, numerous times; and so on.

These are warning signs of potential fraud or unacceptable behavior. Time to check things out!

Ravi Patel

www.patelCFOservices.com

Are Vacations Mandatory?

Vacations are offered at almost all companies as a benefit to the employees. Employees use this time to spend leisure or social time with their families. Employees can hopefully recharge their batteries to come back to work rejuvenated.

Do you require vacations to be mandatory or can employees use the unutilized vacation time as extra cash compensation? If it is the latter, you might be doing a disservice to your employees. Vacations are meant to be used as a benefit for relaxation and should be used as such.

There is another important internal control feature in requiring mandatory vacations. It allows companies to uncover any irregular activities, if there are any, during the absence of  employees. Entrepreneurs should keep in mind this internal control aspect.

Ravi Patel

www.patelCFOservices.com

Segregation of Duties

An important internal control for companies is proper and adequate segregation of duties in key risk areas.

When Entrepreneurs start out, there are fewer people in their organizations and proper segregation of duties is difficult. Entrepreneurs exercise greater oversight over all areas of the company to ensure internal control.

As their businesses grow, Entrepreneurs cannot and should not have too much oversight, but need to develop effective organizations with adequate internal controls with proper segregation of duties

All key business processes need to be examined to review that no individual performs multiple duties such that there is a potential for malfeasance. Duties should be properly segregated to avoid such situations.

For assistance in establishing effective internal controls, please contact us at Patel CFO Services (www.patelCFOservices.com).

Ravi Patel

www.patelCFOservices.com

Internal Controls – Bank Reconciliations

When an Entrepreneur hears bank reconciliation, the first thought that comes to mind is that it is an “accounting thing.” While it is indeed an accounting task, Entrepreneurs should be more familiar with it since it is a significant internal control feature.

Reconciling the balance on the bank statement to the amount in your General Ledger (GL) is normally a monthly procedure, but it can be performed more frequently depending upon the number of your banking transactions. The bank reconciliation process highlights unusual transactions such as customer checks recorded in the GL, but not deposited in the bank; unrecorded bank charges; as well as checks that clear the bank, however, there is no record in the GL. Some of the reconciling differences could identify signs of irregularities in your financial system, including fraud. That last word should definitely get the Entrepreneur’s attention.

A key internal control is assigning the responsibilities of performing and reviewing bank reconciliations. The designation of the proper persons should be based on adequate segregation of duties.

If you need more info, please contact us at www.patelCFOservices.com

Ravi Patel

www.patelCFOservices.com

Internal Controls

While most Entrepreneurs are aware of the need for internal controls in their companies, the size of their organization often limits proper segregation of duties.

In any event, Entrepreneurs should be vigilant about proper checks and balances as they build their organizations. While trusting your people is a fine virtue, a solid company is built on strong systems and procedures with proper internal controls.

Even in a smaller organization, creative division of responsibilities with reviews and approvals can provide adequate controls. We will discuss internal control issues in future posts.

Ravi Patel

www.patelCFOservices.com