*Accounting Controls in Business
What Are Accounting Controls?
Accounting controls are an entity’s procedures and methods for ensuring its financial statements’ assurance, validity, and accuracy. Still, these controls are applied to ensure compliance, safeguard the company, and comply with laws, rules, and regulations.
There are various types of control applied within an organization.
How Do Accounting Controls Work?
Accounting Controls are the measures and controls adopted by an organization to increase efficiency and compliance and ensure that financial statements are accurate when presented to auditors, bankers, investors, and other stakeholders.
Internal accounting controls are not a development now. These have existed in place for decades.
This also makes it a compulsion for organizations to follow corporate disclosure guidelines and other requirements. The point is that accounting controls are an integrated part of any organization nowadays. Without them, the accounting system is like a car without brakes, and no one wants to ride in such a car. So, any organization that aspires to grow big and better must have robust accounting controls.
There are three major categories of accounting internal controls.
#1 – Detective Controls
As the name suggests, these controls are in place to discover discrepancies and deviations from the policies. It also serves the purpose of the integrity check. Accounting controls for cash are examples that can be cited here.
For example, a surprise check of the cash balance in hand with the cashier and cash balance as per accounts will ensure whether the cashier is doing his job accurately or not. It might also reflect any accounting posting error. In a computerized environment where the numbers are huge in volume and end-to-end processing of accounts is done by the system, in those cases, we might want to put a test invoice and track it till accounts finalization to see if it gives the desired result and it is compliant to regulations.
In the same way, comparing the raw physical stock in the warehouse to the closing stock in the books will show the difference in Inventory processing, any discrepancy, or usual loss. Also, ensuring that all the assets showing in the books are physically available ensures the safety of assets.
For example, we have understood that Detective Controls are applied irregularly and are more of an audit nature to identify errors or discrepancies.
#2 – Preventive Controls
The controls are applied daily within the organization to prevent errors or discrepancies from occurring. These are the rules that everyone within the organization has to abide by in their day-to-day jobs.
For example, in an accounting environment, when a person books an invoice, it goes to another person for peer review and approval. Once the invoice is accounted for, another team makes the payment. This is called segregation of duties, ensuring one person does not have control of booking and paying invoices daily.
Job rotation is a classic example of preventive control. In a big organization or at a critical place, personnel are transferred regularly to ensure that no person has access to any data or asset for an extended period, which prevents the person from getting involved in thefts or illegal activities.
In a computerized environment, storing the data daily on the cloud is also a Safety control to avoid data loss.
#3 – Corrective Controls
These controls come to the rescue when preventive and detective controls have failed to avoid an error. In an accounting environment, posting an adjustment or rectification entry is an example of corrective controls. Once the books are closed after the financial year and auditors find an issue to be addressed, reopening the financial yearbooks and making the adjustments an auditor asks for is also a part of corrective control.
In this case, the trial balance still agrees, and later, on verification of ledgers, this error was identified. For example, while posting a journal entry, the accountant debited Mr. Tom instead of Mr. Robert for $500. The rectification entry is to debit Mr. Robert and credit Mr. Tom by $500. It is called corrective control.
Examples
Let us understand the accounting controls definition better from the examples given below:
• Segregation of duties – processor and approver should be two different people.
• An independent user ID and passwords should be provided to all the employees.
• Physical verification of Inventory and Assets should be done.
• Bank reconciliation and other Trial balance reconciliations should be done.
• Standard Operating Procedure documents should be made regarding process flow.
• Surprise check of petty cash and cash book balances.
Checklist For Accounting Controls
While implementing accounting measures for control in an organization, learning the essential points to remember is crucial. Here is a checklist for the organizations to go through before they introduce the controls:
• Any change in one process impacts the other.
• Changes should not be made in the middle of an accounting period, as they will affect the transaction flow.
• Auditors should be informed of any changes.
• Any change should also be documented and communicated well with all the stakeholders.
• It should be cost-effective.
Advantages
When controls are implemented in an organization, the workflow becomes more efficient, as everything is organized and handled correctly. Below are some of the advantages of introducing accounting controls.
Below are some of the advantages of accounting controls.
• The action log identifies the person responsible for any error.
• Accuracy of financial statements and funds application
• Efficient use of the resources for the intended purpose
• Helpful in audit facilitation
• A strong foundation for a more significant growth
• Identification and rectification of any discrepancy identified
• Saving cost and resources
Disadvantages
Despite having several advantages, implementing controls may have some limitations, which organizations must be aware of as they may help them decide which controls to introduce.
Below are some of the disadvantages of accounting controls.
• Sometimes irritating and time-consuming for employees
• The high cost of maintaining controls and standards
• Overdependent on financial statements and audit
• Duplication of work