7 Internal controls every accounting team needs to implement
7 Internal controls every accounting team needs to implement
Introduction
Accounting errors and fraud plague businesses worldwide — and can cause significant financial losses and reputational damage. In fact, according to a recent study by Gartner, 18% of accountants make financial errors at least daily, 33% make a few errors every week, and an eye-opening 59% make several errors per month. That’s nearly 6 in 10 accountants making multiple errors on their financials a month.
As for fraud? The New York Times shared a report that states 40 percent of companies are committing accounting violations and that 10 percent are committing what is considered securities fraud, destroying 1.6 percent of equity value each year — or about $830 billion in 2021.
The common denominator — a lack of robust internal accounting controls, which allows for these errors to go unchecked or unnoticed.
Take for example the collapse of Silicon Valley Bank. Findings from a report by the Federal Reserve indicated issues in SVBFG’s ability to identify internal control weaknesses and manage risks proactively. The report noted that these issues had been lingering since as early as 2016. And while ultimately SVB collapsed due to interest rate risk and a subsequent deposit run — weak internal controls can exacerbate these types of risks, leaving companies like SVB vulnerable to financial mismanagement and regulatory scrutiny.Another example is with the cryptocurrency exchange FTX, which also suffered from a lack of internal controls. The result? Bankruptcy, corporate scandal — and billions of customer’s dollars missing. The company lacked a board of directors, had little to no documentation of meetings, and lacked transparency around ownership and control, all of which could have been avoided by implementing the proper internal controls. In fact, the collapse was so impactful that the Institute of Internal Auditors called on Congress to enact new mandates specifically designed to promote transparency and prevent internal control failures within the cryptocurrency exchanges.
These are both extreme examples, but clearly illustrate the devastating impact of what can happen when internal controls and best practices for corporate governance are missing or ignored. To mitigate that, this article will take a look at the 7 essential internal controls every accounting team needs to implement to ensure the accuracy, reliability, and integrity of their company’s financial information.
1. Separation of duties
The first preventative control to use is separation of duties (SoD), sometimes called. This control aims to prevent fraud, errors, and conflicts of interest by dividing key tasks and responsibilities amongst different individuals within a finance team. In other words, no single person has complete control over a financial transaction from start to finish.
An example of separation of duties would be for one person to be responsible for initiating a transaction, another for authorizing it, and a third for reconciling accounts. Or a second example would be designating separate individuals for your company’s accounts payable and for accounts receivable. This ensures that the individual receiving payments is distinct from the individual disbursing funds.
By enforcing a separation of duties, finance teams can create a system of checks and balances that reduces the risk of both intentional and unintentional mismanagement or misuse of funds. It also increases both transparency and accountability within a finance team, which helps avoid the possibility of fraud or mishandling of money.
Implementing a separation of duties can present some challenges, like resistance to change or just resource constraints. But these can easily be overcome through training, clear lines of communication, and by leveraging accounting automation to streamline processes and enforce duties more effectively.
2. Access controls
The first preventative control to use is separation of duties (SoD), sometimes called. This control aims to prevent fraud, errors, and conflicts of interest by dividing key tasks and responsibilities amongst different individuals within a finance team. In other words, no single person has complete control over a financial transaction from start to finish.
An example of separation of duties would be fThe second measure every finance team should implement are access controls. These are the policies, procedures, and mechanisms that a finance team puts in place to control and monitor the access to financial data and systems within an organization. Access controls play a crucial role in safeguarding sensitive financial information by restricting access to data, and prevent unauthorized individuals from tampering with or misusing critical financial information.
Examples of access controls would be:
Physical controls: For example, the locks on your office building’s doors, a card security terminal for gaining entry into your IT room, and surveillance cameras that prevent unauthorized access to areas where financial data may be stored.
Administrative access controls: This includes the policies around who can access what information at what times. Examples are, background checks for employees handling sensitive financial data, and guidelines on how to determine who should be granted access to important data.
Technical controls: For example, implementing user accounts with unique usernames and passwords, or incorporating multi-factor authentication requirements when signing into financial systems (e.g. requiring a one-time code be sent to a mobile device).
By enforcing these types of controls and adhering to best practices for password management, finance teams can lower the risk of data breaches and financial fraud — and ensure more controlled access to confidential financial data and info.
3. Physical audits
If you run a business that carries physical inventory, then the third control that is extremely important is conducting physical audits of your products. Simply put, these are inventory counts, that verify the count of a business’ physical inventory against what’s recorded in their accounting system.
Running a physical audit allows you to identify discrepancies, like data entry errors, theft, damage, or inefficiencies in ordering. And by promptly addressing these issues, finance teams can minimize potential risks and improve inventory management as a whole.
To maximize how effective these are, it’s sometimes necessary to run surprise counts to minimize any potential manipulation of data. And by implementing in-depth documentation for internal audits—including a record of the count, the personnel involved, and any variances noted—your team can create a clear audit trail. This documentation makes further physical audits easier and provides valuable insight into where processes can be improved.
To simplify audits even further, technology can increase the efficiency and accuracy of physical counts. For example, inventory management software minimizes human error and expedites how quickly a count can be completed — allowing your finance team to focus on more strategic analysis and decision making.
4. Standardized financial documents
This one should come as no surprise — the use of standardization for financial documents. Maintaining consistency with important documents like invoices, receipts, and purchase orders not only creates efficiencies, it ensures that there is a uniformity to financial reporting across your organization. This uniformity eliminates confusion for internal stakeholders when tracking down specific information, and minimizes accounting errors and discrepancies with employees who have to manually enter data.
To further improve standardization, it’s helpful to use a platform like Brex that employs AI to automatically capture the data from receipts, generate standardized bill payments, and create consistency with reporting. This not only simplifies month-end close, but it saves employees time when tracking spend, and saves time for accounting teams time by automating reconciliation at month-end.
5. Periodic trial balances
The fifth internal control that every finance team should implement is periodic trial balances. This gives your finance team a financial snapshot of specific moments in time (e.g. a quarterly report) that allows you to effectively compare your numbers against previous balances. A trial balance typically lists all general ledger accounts and their ending balances (debits or credits). And if the total debits don’t equal the total credits, you know there is an inconsistency somewhere in the books.
Performing a trial balance is easy, and involves summarizing all account balances and comparing your totals. And this should typically be done periodically, on a regular basis, like at the end of each accounting period (month, quarter, year). Where it can get difficult is tracking down where exactly the issues or discrepancies are.
Again, this is where a platform like Brex can help. Not only does Brex allow two way syncing with multiple ERP integrations, the use of Brex AI can automatically notify you of duplicate transactions with spending, as they happen. Which means less time trying to track down discrepancies, and more control over company-wide spend.
6. Periodic reconciliations
The next internal control to consider are periodic reconciliations. Similar to periodic trial balances, these are run on a regular basis, and compare your internal accounting records with external sources. For example, if you use a spend management software like Brex to track all employee spending, you would want to reconcile all the transactions at the end of the month or quarter to ensure every dollar is accounted for.
Common examples of accounts you’d reconcile are:
Bank accounts: Where you compare internal cash balances to bank statements to identify any missing deposits, outstanding checks, or accounting errors.
Credit card statements: Ensuring that all charges are legitimate and no unauthorized activity has occurred.
Accounts receivable: Comparing the total amount listed in your accounts receivable with any outstanding balances from customers.
Periodic reconciliations are extremely important because they help:
Identify errors: Catching typos, missing transactions, or other mistakes that cause inconsistencies.
Detect fraud: Discrepancies can be red flags for potential fraudulent activity, allowing for early intervention.
Ensure compliance: Regular reconciliations help companies adhere to accounting standards and regulations.
Maintain accuracy: They ensure your financial statements reflect a true and accurate picture of the company's financial position.
And while you can manually reconcile your accounts, platforms like Brex actually use AI and accounting automation to automatically match transactions, and flag anything that needs a closer look. This simplifies all of your month-end work, and allows you to focus on less annoying, manual processes.
7. Approval workflows
The final control that every finance team should implement to drive efficiency and support responsible spending: approval workflows. These are a critical internal control that ensures only authorized spending is taking place. Approval workflows increase transparency and define a clear path for business transactions to get pushed through.
For example, let’s say a company’s marketing team pitches a new social media campaign. They might be looking for a $50,000 budget. And instead of just going ahead on their own and charging it to the company, an approval workflow may look something like this:
Initial proposal: The marketing team creates a detailed proposal outlining the campaign goals, budget breakdown, and expected return on investment (ROI).
Manager review: The proposal is submitted to the Marketing Manager for initial review and any potential revisions.
Finance team approval: Once approved by the Marketing Manager, the proposal is routed to the Finance team for budget review in relation to company wide spend.
Approved.
This is an extremely simplified version of a workflow, but gives you a sense of how adding various steps to an approval on spending can increase accountability. It also creates a documented audit trail so you can track exactly where money is going. This multi-layered approach minimizes the risk of unwanted spending and ensures everything stays on budget.
And while managing approval workflows can certainly be done manually, they are significantly simplified with the right technology. In fact, you can even pre-approve spend on platforms like Brex, or set budgets with pre-allocated limits across departments — which means not having to chase down the right person for an approval.
Implementing internal controls doesn’t have to be hard
It should go without saying that your financial data is the backbone of your business. It drives decision making, informs growth, and dictates strategic investments. Every decision, from resource allocation to budgeting, hinges on the accuracy and reliability of this data. But do you ever stop to think about what safeguards this incredibly vital information? The answer lies in a system of internal controls.
These controls act as a safety net for all of your financial data, preventing errors and ensuring its integrity. Dividing key financial tasks among multiple individuals prevents any single person from having complete control over a transaction. Strict policies, procedures, and technology restrict access to financial data and systems, safeguarding sensitive information. Regularly verifying inventory against accounting records ensures accuracy and minimizes losses. Implementing standardized documentation templates eliminates confusion and minimizes data entry errors. Comparing your debit and credit balances at regular intervals identifies inconsistencies and potential errors. Regularly comparing internal records with external sources catches discrepancies and ensures your financial data reflects reality. And creating well-defined processes for transaction approvals increases transparency and minimizes the risk of unwanted spending.
Not only do these controls minimize errors — they ensure the reliability of financial statements, providing a solid foundation on which to build and grow your business. Better yet? They create a system that protects you against fraudulent activity and mismanaged funds.
And implementing these types of controls is easier than ever with the help of technology-driven tools like Brex. Our platform automates accounting tasks and saves finance teams both time and resources on manual tasks, so they can focus more on higher-level analysis and strategic planning.
In fact, businesses save 4,250 hours on average using Brex’s expense and accounting automation, and increase their expense compliance across the board to 99%. Book a demo today and see how for yourself how Brex can simplify your processes, and increase the control you have over every dollar spent.