SGBS and Internal Controls
Content provided by Greater Tomorrow Initiative
In the EDC’s Enterprise Digest of 2011, the Editor’s note highlighted that Nigeria was ranked 133rd out of 183 economies in the 2012 Doing Business Report by the World Bank – a ranking that has not changed in two years. In a relative development, another report points out Electricity, Access to finance and Transportation as the identified problems limiting efficient operations. It is on this background that this article becomes a major consideration for SGB’s sustainability. After gaining access to finance, procuring transportation and providing for electricity, a critical element becomes INTERNAL CONTROLS!
As the saying goes ‘It requires a great deal of boldness and a great deal of caution to make a great fortune and when you have it, it requires ten times as much skill to keep it.’
– Ralph Waldo Emerson
Internal controls involve the methods and policies designed in the interest of an organization or business to:
- Minimize errors and inconsistency
- Safeguard assets
- Prevent fraud/mismanagement
- Achieve compliance, establish legal and accounting policies and procedures
Internal Controls could be 1) Preventive; Controls that are designed to discourage errors or irregularities from occurring; 2) Detective; Controls designed to find errors or irregularities after they have occurred.
Preventive Internal Control include;
- Segregation of duties
- Written policies and procedures
- Control environment
Segregation of Duties: This is a method of working whereby tasks are apportioned between different members of staff to reduce the risk of error and fraud. This is the most important internal control, but the least likely to occur! SGB’s owes itself to engage in this policy effectively while it is still at the small business stage to avoid greater risk of loss and inefficiency.
Duties to be Segregated
- Recordkeeping and Review
The person that creates and maintains financial records and reports should not be the person that reviews and analyzes this information.
- Authorization and Reconciliation
The person that approves purchases and bank transactions should not reconcile bank or credit card statements, or other purchase documentation.
Common Segregation of Duty Procedures
- Cheques are prepared by one person and signed by another
- Cheques above a certain amount require two signatures
- Bank reconciliations are performed by someone without cheque signing authority
- The person that opens the mail has no accounting responsibilities
- The Board must approve the Executive Director's expenditures over a certain amount
- Bank deposits are verified after each deposit by someone other than the person that made the deposit
- All purchases require pre-authorization and verified receipt
Written Policies and Procedures
Error and fraud often occur because there are no written policies or procedures that employees must follow. SGB’s often consider this irrelevant because they are “small” forgetting that they must build their businesses on the right principles. Employers assume the moral rightness of the employee while the employee presumes and often times thrives on the negligence of the employer to do as he/she pleases. Even when written policies or procedures exist, unless employees are regularly trained on these matters, they are seldom implemented.
What ethical tone, attitude, and methods of operation are set by board and management? Is there a regular schedule for producing and reviewing periodic financial reports that compare budget to actual expenditures? Are financial information and contracts readily shared with staff? Are conflicts of interest deterred by avoiding dealings with friends and family? These and many more the SGB must take into consideration as the business grows.
Detective controls includes 1) Inventories; Regular inventories of physical assets such as cash, unsigned cheques, equipment, supplies, and materials. 2) Internal Audits; Periodic unannounced examinations of the files, approvals, and bank records. As a SGB, let us begin today and more firmly engage the process of Internal Controls for the sustainability of our businesses.
Article written by:
Blessed Edim Uwatt (Greater Tomorrow Initiative)
Greater Tomorrow Initiative