How would you assess the strength of your existing internal controls system? Many people who work in an operational capacity for a dealership would guess that their internal control system is strong. Others would acknowledge that their system needs improvement. And then there are those folks who genuinely have no idea about the integrity of their internal controls.
Fortunately, there are some straightforward ways to assess the strength of your internal controls system, understand why you need one, and begin implementing the right system for your practice.
Why do you need a strong internal controls system?
According to data on employee theft, over $50 billion is stolen annually from businesses in the U.S. by employees. A strong internal control system can prevent those dollars from being siphoned off the bottom line and can establish the mechanisms to stop fraud before it starts.
The most effective internal controls are built into the dealership’s daily operations, implemented by the people who work in the system, and adaptable to changes in the business. Having the right controls in place can help you avoid the pitfalls of a weakened system, which include such risks as business losses, fraud, poor employee morale, tarnished brand image or financial misstatements.
Building a strong internal controls system requires some research on your part, including due diligence, to establish the foundation of your controls program. These key elements include (1) the establishment of a control environment, (2) a comprehensive risk assessment, (3) identified control activities, (4) a robust communication system, and (5) clearly defined monitoring activities. Below are actions to take to build a strong program:
- Demonstrate a commitment to integrity and ethical values
- Exercise oversight responsibility
- Establish structure
- Demonstrate commitment to competence
- Enforce accountability
- Specify suitable objectives
- Identify and analyze risk
- Assess fraud risk
- Identify and assess significant changes
- Select and develop control activities
- Select and develop general controls
- Deploy thorough policies and procedures achieving segregation of duties were possible
- Institute physical controls on the physical safeguarding of inventory, facilities, files, computer programs and accounting records
Information and Communication
- Use relevant information
- Communicate both internally and externally
- Conduct ongoing and separate evaluations
- Evaluate and communicate deficiencies
- Conduct top level review of reports and reconciliations
How do good internal controls help protect against fraud?
Elements of adequate oversight are not complicated and generally can be accomplished using existing staff. A common and effective practice is to restrict an employee’s access to the record keeping aspect of the function for which they handle the cash.
For example, in the case of cash receipts, have the receptionist open the mail and collect any remittances. Copies of the checks can then be forwarded to the accounting department to be processed. The receptionist then prepares the deposit slip and makes the deposit. You have just segregated duties, prevented the accounts receivable clerk from having access to a live customer check, and added a layer of protection.
In the case of cash disbursements, have the accounts payable clerk prepare the checks for signature. Once reviewed and signed, have the payroll clerk stuff the envelopes and mail the checks. Again, you have segregated duties, prevented the accounts payable clerk from having access to a live (signed) company check, and added a layer of protection.
Much like the locks on the doors, adequate oversight is often an effective tool for keeping honest people honest. Understanding and embracing these basic concepts can prove to be one of the most valuable safeguards available.
Everyone in business, including dealerships, should have an internal controls system in place that is regularly tested, monitored and updated. CSH can help you no matter where your organization stands in the process. For more information contact Frank Panzeca at firstname.lastname@example.org.