Accounting Controls: What they are and How they are Used

Accounting controls are standardized methods that reduce errors and mismanagement. Even the smallest companies can implement basic accounting controls to ensure proper handling of financial transactions.

Credit Controls

Credit controls mitigate the risk of customers not paying after they purchase products on credit. Standard controls include the following:

Review a company’s payment history. Before approving a credit line, review a company’s Dun & Bradstreet report.  Many companies have been scammed by customers that have no intention of paying.

Initiate a reliable communication system for sales and shipping departments. If a customer is late with payments or has exceeded their credit line, the people that need to know are salespeople and shipping personnel. This is to prevent further sales on credit or shipments from going out for customers that may be at risk of paying.

Assign credit lines within the company’s appetite for risk. Doing so requires both qualitative and quantitative analysis. Decision makers should be interviewed to gauge how much they are willing to lose in bad debt each sales period. Larger customers with sketchy payment histories may need to pay a portion of each order prior to shipment.

Expense Report Controls

Expense reports are itemizations of employee expenses to be reimbursed. The most stringent control is that the accounting department reviews all receipts in detail before approving reimbursement. However, this may be a costly and wasteful use of an accountant’s time. Instead, consider implementing the following controls to ensure expense reports are properly submitted:

Spot-check a small portion of expense reports. Typically, companies spot-check between 10 and 25 percent of expense reports submitted each month. This way, employees know that their expense report may be reviewed. This is an effective deterrent for submitting exaggerated or false reimbursement requests. If a problem is found, a full-scale review of the employee’s previous reports is performed, which is a more valuable use of the accountant’s time.

Minimize the need for employee reimbursements. The majority of expense reports are submitted for travel expenses. Companies that centralize travel under one department could arrange payment for flights, rental cars, and other expenses ahead of time, thereby reducing costs an employee would have to pay out of pocket. This could free up accountants to review remaining expenses or to work on more urgent business.

Automate the expense report process. Software packages such as those produced by Concur or Propensity have the employee do all the work. These packages enforce reimbursement policies by disallowing, for example, purchases of alcohol or SUV rental cars.

Similar controls are used for tracking inventory, the use of petty cash, payroll, and other functions, no matter the size of the company. Simple controls limit the propensity for mistakes and fraud without increasing costs. Only controls that are never relaxed and properly enforced will yield the desired results of reducing fraud and mismanagement.

Sources

http://www.accountingtools.com/podcast-index/

http://f2.washington.edu/fm/fa/internal-controls

 

About Sara Huter

Sara Huter has over 15 years experience in the banking and energy industries, and over 10 years as an adjunct professor. Her work has been published for BusinessBee.com, the International Directory of Company Histories, the Encyclopedia of Business Insights: Global, EHow.com, and Examiner.com. Find out more about Sara at her Google+ Profile.

 

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