SERIES 1 – Practical Guides to Operating as a v-CFO
Is Everything Under Control?
What are Internal Controls?
Internal controls are the procedures and methods by which companies and organisations achieve their performance, profitability targets and prevent the loss of resources/assets. They are also the means by which recording is relevant, timely and accurate as well as being compliant with the relevant laws and regulations
These controls assist in helping a company achieve its planned budgets as well as limiting internal and external risks or threats any business might encounter. Almost every business will experience at some time the pain and frustration of not being in control, so having the discipline to systematically and methodically approach the implementation of controls will become inevitable.
Having controls and procedures allows the business to be managed properly giving the entrepreneur time and freedom to manage the business rather than the business managing the entrepreneur.
Many SME owners really do not give any thought to controls believing that these are the domain of listed companies, or Government Departments. Nothing could be further from the truth.
The need to have robust controls and procedures can be exemplified in the case of RBS being fined GBP 450,000 by the Hong Kong financial regulators in 2014 following the failure to detect GBP 25 million of losses hidden by a rogue dealer. The trader managed to hide the losses over a three-year period by cancelling or amending deals entered into the RBS internal trading system. The subsequent investigation by the Hong Kong Securities and Futures Commission ruled that the internal controls were “deficient and failed to prevent misconduct”
Its not difficult to come across other reported acts of dishonesty and with far bigger numbers!
The point here is that as a company grows and the management find themselves inevitably being moved further away from the detail and daily operating procedures; business owners cannot see as much as they would like to. Without an aging of debtor’s system, a manager will not always be alerted to delays in payment, for example
Many business owners before they come to us feel reluctant to allow their firm to grow further than it has because they are already overwhelmed by managing the company without the proper tools in place; they feel they and the business will collapse under the weight of the increasing administrative burden
The 5 Key Elements for Effective Internal Controls:
- Segregation of duties: Key tasks in an organisation should be done by different people; authorising, processing and reviewing performed seperately will help with prevention and detection of both intentional and unintentional errors
- Authorisation: Transactions should be validated and authorised by people acting within their level of authority. Creating an authorisation matrix prevents ambiguity and helps prevent invalid transactions
- Documentation: All transactions should be documented. This ensures that recording and reporting can be produced accurately and completely
- Reconciliations: Records will be validated for accuracy and will detect any anomalies that can be investigated quickly
- Leadership: This ensures the overall objectives of the controls are being achieved
For internal controls to be effective they must be effective, operate consistently and must be cost effective. If the controls are effective, they will prevent errors from occurring in the first place and should they occur they will be detected quickly. Furthermore, they will safeguard employees through clear responsibilities
How does a v-CFO create internal controls – a check list?
- The v-CFO should explain what ‘internal controls’ are and how they benefit the business ongoing
- Demonstrate how delegation of duties and responsibilities can work with the existing structure.
- Implement systems for monthly control accounts.
- Production monthly management accounts.
- Establish targeted reporting KPIs.
- Review computer systems to ensure that they are robust and will allow for growth in line with the published business plan.
- Establish corporate governance for meetings, including board meetings minutes.
- Establish simple and easy to use Human Resource systems.
- Design and implement credit control procedures.
- Translate all figures and data in a way which makes sense to the business management team.
- Establish an authorisation matrix – who is responsible for differing levels of sign off
- Processes for investment appraisal and approval.
- New customer approval processes (credit checks).
- Implement procedures to ensure customers are paying you correctly and on time.
- Create reports for customer and product profitability assessment.
- Create gateway processes for new products to be approved
- Create a system for cash flow forecasting and monitoring, including early warning system for inter-month peaks and troughs.
- Develop and implement systems across the business for managing procedures.
- Establish budgeting methodologies with the management team including effective review
- Review insurances to ensure the best possible risk cover.
- Ensure brands and IP are protected.
PARTNER & DIRECTOR OF ACCOUNTING & CFO SERVICES