Internal control is a system of procedures and cross checking that in the absence of collusion minimizes the likelihood of misappropriation of assets or misstatement of the accounts, and maximizes the likelihood of detection if this occurs. For the most part, internal control does not prevent embezzlement but should insure that, if committed, it will be promptly discovered, and the identity of the perpetrator known. This likelihood of discovery usually persuades most not to allow temptation to get the better of them.

The most obvious reason for having a good system of internal control is to prevent the loss through theft of the organization’s assets. A second, equally important, reason is to prevent “honest” employees and volunteers from making a mistake that could ruin their lives.

How is Fraud Detected?

During the course of a CPA audit 2%
As a result of an internal audit 18%
Whistle blowers 30%
Sheer accident 50%

Listed below are some suggested internal control measures:

1. Require two signatures on every check. If this is too cumbersome, consider a second signature over a certain amount, like a thousand dollars.

2. Do not use a signature stamp, or have any checks pre-signed.

3. Have bank statements and cancelled checks opened and reviewed by someone other than the person who writes the checks. This would most likely be the Executive Director.

4. Prohibit anyone in the accounting department from being a signer on bank accounts.

5. Prohibit anyone in the accounting department from opening the mail.

6. Have all checks endorsed by whomever opens the mail with a pre-made stamp that says, “For Deposit Only”, and shows the organization’s name and account number.

7. Someone other than accounting personnel should then record checks and cash received in a pre-numbered original book of entry with duplicate pages. One copy should be attached to the checks when given to the accounting department, and the other copy remaining attached to the book.

8. Reconcile pre-numbered receipts to deposit slips and bank statements on a regular basis.

9. Have a separation of duties within the accounting department.

10. Keep all blank checks, un-deposited funds, and petty cash under lock and key with access limited to authorized personnel.

11. Use only pre-numbered checks.

12. Remove the signature portion of all voided checks.

13. Have all employees who handle checks bonded.

14. Incorporate written internal control policies.

15. Have your CPA firm evaluate your system of internal control annually.

16. Do a random check on bank reconciliations and investigate checks that fail to clear the bank.

17. Periodically check the bank’s records of authorized signers on signature cards and wire transfer contracts.

18. Institute a pre-numbering inventory system and year-end physical count of all assets.