Tips for Defining and Implementing Internal Control

The term “internal control” is usually associated with a discussion of large companies and their policies and procedures. Broadly defined, internal control refers to the standards and procedures that a company establishes to protect its assets.

One of the reasons that little attention is paid to this area in small businesses such as kitchen and bath firms is that most of us started out alone, or perhaps with one partner. As owners, we initiated and/or reviewed each and every transaction, signed every check and maintained all of the company’s equipment.

Over the years, our companies grew and we hired people to help us conduct our business. There is a natural tendency for us to assume that the people we hire are honest and trustworthy; sadly, this is not always the case.

This month, we’ll look at some of the ways a kitchen and bath firm can protect itself from the temptations and tendencies that may be present in employees. We will also review hiring practices, procedures for handling assets and some things dealers can do to stay attuned to what’s going on in their business.

Hiring the Right People
There are a number of factors that cause us to be less discerning than we should be when adding staff members to our companies. First, there is a tendency to want to believe that everyone is honest. The truth is, most people are honest most of the time, but not everyone is honest all of the time. Couple this with our own feeling that we are excellent judges of character, capable of correctly evaluating an individual after a brief interview, and we have a prescription for making a quick and potentially dangerous decision.

As with many of the things we are going to discuss, it is important to establish a set of procedures to be followed with all staffing and hiring decisions. Some of the elements that should go into this process include the following:

  • Have all potential employees complete an application form, in their own handwriting. The form should ask for all relevant information about the employee.
  • Have the potential employee return for two or three follow-up interviews with both yourself and some of your other staff members. Try to have an interview that includes the person the new employee will work with directly.
  • Ask the tough questions, even though the wrong answer will be obvious and a less than truthful answer can be expected regardless of the facts. This includes such questions as: “Have you ever had any trouble with the law?” “Do you have any problems with drugs or alcohol?” “Is there anything we should know about you that we haven’t asked?”
  • Check references carefully, including personal references and former employers. You will find many former employers are reluctant to discuss any problems that they may have had with an employee for fear of legal repercussions. A telling question you should ask is: “Is this person eligible to be rehired?”
  • Particularly if the potential employee will be handling cash or bank accounts, you should look carefully at the person’s financial situation, i.e. personal bankruptcies, etc.
  • Finally, there are services that will perform background checks on individuals; consider utilizing these.

Internal Control Procedures
As your company grows, it will become necessary to delegate some of the duties and tasks that you have been performing. In order to protect your assets, you need to understand that this involves more than simply having someone else do what you have been doing. Here are some of the basic tenets of internal control:

  • Division of responsibilities: Every attempt should be made to set up procedures where it would require two people colluding to remove assets inappropriately from the business. For instance, the person who reconciles the bank account should not be the same one who prepares and signs checks.

    All checks made out to the company should be stamped with a “restrictive endorsement,” which requires deposit-only to the company’s bank account.

    Likewise, the person processing invoices from suppliers for payment should not have the authority to place orders with the supplier.

  • Authority to make purchases on the company’s behalf: While it is convenient to provide employees with credit cards for gas purchases and materials at the local store, such cards are an opportunity for abuse. Have employees turn in all receipts for such purchases to your accounting department, and have them match them to the bills from these companies.

    Make sure you are clear with all employees that have such credit privileges what things are and are not approved purchases. For instance, is it okay to charge a new saw to the company? What about saw blades or nails? Likewise, is it okay to charge gas if the vehicle is being used for personal use?

    If the company provides cell phones for employees, make sure that you have a policy in place for what appropriate uses of phones are. Again, someone other than one of the users should be reviewing the phone bills to watch for excessive use and unauthorized calls.

  • Time is money: If you are paying employees by the hour, particularly if they are working in the field without supervision, you will need to set up procedures to make sure that your company is getting eight hours’ worth of work for the eight hours’ pay. Padding time cards is a common problem for small construction companies.

    As the owner of a small business, there are several steps and actions that you can take to protect your assets.

    Following are some things to think about:

  • Try to avoid situations where an employee will be tempted to cheat or steal from the company. Otherwise, honest people will sometimes give in to temptation.
  • Have all of the company mail brought to you to look through before it is distributed to the individuals and departments within the company. This is a really good way to keep a pulse on your company and pick up on complaints or suspicious billing from suppliers that could indicate problems.
  • Make sure that all employees take regular vacations and that someone takes over their work while they are gone.
  • Monitor your company’s cash flow and financials. If something doesn’t seem to add up, investigate the situation immediately.

Ultimately, the honesty and integrity of your employees is the most important element in protecting company assets. Make sure that you provide them with the situation and procedures to make that possible.