Accounting: The Language of Business (Part 21)

“Behind every good businessman there is a great accountant.” —Unknown

Accounting Systems and Internal Controls

(Part B)

by

Charles Lamson

Internal Control

Businesses use internal controls to guide their operations, safeguard assets, and prevent abuses of their systems. For example, assume that you own and manage a lawn care service. Your business uses several employee teams, and you provide each team with a vehicle and lawn equipment. What are some of the issues you would face as a manager in controlling the operations of this business? Below are some examples.

• Lawn care must be provided on time.

• The quality of lawn care services must meet customer expectations.

• Employees must provide work for the hours they are paid.

• Lawn care equipment should be used for business purposes only.

• Vehicles should be used for business purposes only.

• Customers must be billed and bills collected for services rendered.

How would you address these issues? You could, for example, develop a schedule at the beginning of each day and then inspect the work at the end of the day to verify that it was completed according to quality standards. You could have "surprise" inspections by arriving on site at random times to verify that the teams are working according to schedule. You could require employees to "clock in" at the beginning of the day and "clock out" at the end of the day to make sure that they are paid for hours worked. You could require the work teams to return the vehicles and equipment to a central location to prevent unauthorized use. You could keep a log of odometer readings at the end of each day to verify that the vehicle has not been used for "joy riding." You could bill customers after you have inspected the work and then monitor the collection of all receivables. All of these are examples of internal control.

Objectives of Internal Control

The objectives of internal control are to provide reasonable assurance that:

1. Assets are safeguarded and used for business purposes.

2. Business information is accurate.

3. Employees comply with laws and regulations.

Internal control can safeguard assets by preventing theft, fraud, misuse, or misplacement. One of the most serious breaches of internal control is employee fraud. Employee fraud is the intentional act of deceiving an employer for personal gain. Such deception may range from purposely overstating expenses on a travel expense report in order to receive a higher reimbursement to embezzling millions of dollars through complex schemes.

Accurate business information is necessary for operating a business successfully. The safeguarding of assets and accurate information often go hand-in-hand. The reason is that employees attempting to defraud a business will also need to adjust the accounting records in order to hide the fraud.

Businesses must comply with applicable laws, regulations, and financial reporting standards. Examples of such standards and laws include environmental regulations, contract terms, safety regulations, and generally accepted accounting principles (GAAP).

*WARREN, REEVE, & FESS, 2005, ACCOUNTING, 21ST ED., PP. 184-185*

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