Accounting

Fraud is intentional deceit or trickery that results in a misstatement of the financial statements. Management is responsible for taking steps to reduce the risk of fraud. After quite a few instances of fraud in many large, publicly owned companies in recent years, a number of accounting reforms have been instituted to safeguard against fraud. One major change was the Sarbanes-Oxley Act (SOX) of 2002.

SOX included a set of reforms that toughened penalties for corporate fraud, restricted the types of consulting that CPAs can perform for audit clients, and created the Public Company Accounting Oversight Board (PCAOB). SOX requires publicly-traded companies to follow government policies and procedures.

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Since cash is the most liquid of all assets, it needs to be safeguarded. Both large and small companies are susceptible to fraud and other unethical activities without proper controls in place. Managers and business owners can protect against fraud by using an internal control system to protect their assets. An effective control system can also help businesses to conduct reliable accounting, operate efficiently, and encourage employees to follow company policies.

To ensure that the internal controls implemented around cash are designed properly, there should be a segregation of duties:

  • Recordkeeping
  • Custody
  • Authorization
  • Reconciliation

In an ideal situation, there should be one individual assigned the responsibility of only one component. The record-keeping function of an asset should be separated from the custody of an asset. In addition, the individual responsible for authorizing a transaction related to cash should not be the same person that has custody of that cash or performs the recordkeeping. Furthermore, reconciliations should be completed by different individuals to ensure that the internal controls are working effectively. This includes doing physical audits, checks, and reviews of internal control procedures that are in place to catch errors in time and to avoid fraud. We’ll dive into this further in this activity.

Now that you understand the segregation of employee duties, imagine you own a small retail business and employ four employees. Prepare a one-to-two page report in which you respond to the following prompts. If you use any additional resources, use APA format for your citations.

  • Identify the type of company you own and briefly describe the nature of your business. Perhaps you sell shoes, clothing, furniture, or computers. You might own a restaurant or a small drug store or a small walk-in health clinic.
  • Identify at least two kinds of internal control procedures that you can implement to protect your cash.

    How would you protect the inventory in your warehouse?
    How would you protect the cash in your cash register?
    How would you protect your electronic data, such as banking information?

  • How can internal controls help to protect your cash receipts and disbursements?
  • How can you use technology to implement an effective internal control system to help your business? Explain your answer.

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