Internal Controls for the Closely-Held Business

Placing too much trust in an employee can lead to tragic consequences for a company’s stakeholders and for the employee. All businesses need procedures designed to reduce the likelihood of misappropriation of assets. At the core of such

safeguarding procedures is “segregation of duties”, which means that the acts of 1) approving, 2) executing and 3) recording transactions should be separated. Not separating these functions may place an individual in a position to misuse company assets and then cover it up.

It can be challenging to create an effective internal control environment at a small enterprise; however, it is certainly possible. Management must create proper documentation of policies, processes, procedures and steps, and Management must conduct periodic checks that are properly structured so as to review various types of transactions. Vouching a random selection of all transactions occurring in each fiscal year AND all transactions occurring within a randomly selected short period of time within the year is very effective in preventing and detecting misuse of assets. I have structured this type of control system for enterprises that have high dollar volume of transactions relative to staff population. Controls of this type are important for all businesses, and are particularly critical in situations where adequate segregation of duties is not feasible. These controls make it likely that irregularities are either prevented or detected before the amount of the loss grows large.