How to Implement Effective Accounting Controls in Your Business
Every business, regardless of size, needs proper accounting controls to maintain financial stability and overall success. Accounting controls are processes, procedures, and policies that ensure the management, monitoring, and protection of the company’s financial resources. Controls that are properly put in place will not only help save your assets but also give an upper hand on accuracy in financial reporting, lessen the risk of fraud, and enhance operational efficiency. This article explains how to ensure that your business has sound accounting controls and discusses the steps to keep your books in order.
Why Accounting Controls Are Important
First, before getting into the details, why are accounting controls important? Effective controls over accounting ensure that each financial transaction is recorded appropriately and promptly. This information will help you make effective decisions based on reliable data. Besides, it secures you from fraudulent activities and financial mismanagement that may prove fatal for any business.
When properly applied, accounting controls also provide the information necessary for compliance with the applicable laws and regulations. One of these concerns is the business accounting UK. These controls vary from business to business based on the size and nature of the business. However, the rules and regulations behind these are always the same.
1: Define Policies and Procedures
First, effective accounting controls must be established by setting up transparent policies and procedures that define how financial transactions should be managed. This ranges from how expenses are approved to how revenues are recorded. Outsourcing accountants can play a crucial role in implementing these controls by providing expertise and ensuring that these policies are adhered to consistently.
First, document all financial processes. The documentation should contain information on who is to do what, how they will do it, and what tools or systems they will use. Your policy might dictate that every expense exceeding a certain amount first needs approval from the manager to execute a payment. On the other hand, income accruing from sales should be recorded immediately after the transaction.
Ensure that such policies and procedures are communicated to all relevant employees, and provide training where necessary to enable them to understand what each role plays in maintaining effective controls over accounting.
2: Duties Segregation
This involves segregating the duties so that no employee controls all parts of the financial transaction. Segregation of duties is one of the best ways to prevent fraud and error within your business accounting processes.
For example, one employee may be responsible for processing transactions, a second might be involved in reconciling the related accounts, and a third may be required to authorise payments. By segregating those duties, you reduce the opportunity for fraud because misstatements now require collusion among employees.
Where the segregation of duties cannot be completely performed in smaller businesses, other checks and balances should be considered. For example, a manager’s timely review and approval of transactions can reduce risks to a minimum.
3: Establish Effective Access Controls
Access controls are an integral part of good accounting controls. They can help specify who should access your financial systems and data and assure that only authorised personnel represent a certain task.
Begin the process of good access controls by restricting access to sensitive financial information only to those employees who truly need it for their work. This might be accomplished through a role-based access control system, whereby permission is granted according to one’s role in the company. For instance, your accounts payable clerk will likely have to deal with the invoicing system and won’t need access to payroll information.
Also, use passwords, encryption, and other security measures to protect your financial data. Remember to review and update access controls regularly to remain appropriate as your business evolves.
4: Reconcile Accounts Regularly
The other aspect of accounting controls is the regular reconciliation of accounts. This involves checking whether the balance carried forward in the books of accounts agrees with that found on the bank statement.
Reconciling your accounts regularly will allow you to identify any discrepancies early, solving the problem before it becomes a general issue. For instance, if you have not recorded a bank deposit in your accounting, reconciliation will inform you and make necessary corrections.
If your business generates many transactions, make reconciliations monthly or as often as necessary. This is crucial in ensuring that your financial records are always accurate and helping your UK business accounting comply with the relevant authorities.
5: Keep a check on your financial reports and review them.
You must monitor and review financial reports regularly to ensure that your accounting controls are working effectively. Such reports provide a snapshot of your business’s financial health and highlight areas where controls may need tightening up or adjustment.
Implement a timetable for reviewing financial reports: an income statement, balance sheet, and cash flow statement. Check unusual or unexpected figures in these reports; these may be mathematical errors or fraud.
Apart from an internal review, you may want an external auditor to review your financial statements from time to time. Such an independent review may further ensure that accounting controls are effective and financial records are accurate.
Conclusion
Accounting controls are segregation, access controls, policies and procedures, account reconciliations, and financial report monitoring actions to ensure that your business will remain healthy from a financial point of view for the long term. By establishing good policies and procedures, segregating duties, implementing sound access controls, regularly reconciling key accounts, and properly monitoring the financial reports, you will have built an adequate framework around your assets and assure proper support for sound financial decision-making.
As this year draws close, it’s time to review your accounting controls and make all necessary changes. This proactive step will help ensure that your end of year account are as accurate as possible and that your business is set up for future growth and success.