Smart hiring practices and seperation of duties

Control procedures built into the control environment and information system are the means by which companies gain access to the five objectives of internal controls discussed previously. Examples include proper separation of duties, comparison and other checks, adequate records, proper approvals, and physical safeguards to protect assets from theft. AMEX Products regularly reviews its framework of internal controls, which includes the company’s policies, procedures and organizational structure. Corrective actions are taken to address any control deficiencies, and improvements are implemented as appropriate whether the business is AMEX Products, Microsoft, or a Starbucks store, every major class of transactions needs to have the following internal control procedures.

In a business with good internal controls, no important duty is overlooked. Each person in the information chain is important. The chain should start with hiring. Background checks should be conducted on job applicants. Proper training and supervision, as well as paying competitive salaries, helps ensure that all employees are sufficiently competent for their jobs. Employee responsibilities should be clearly laid out in position descriptions. For example, the treasurers department should be in charge of cash handling, as well as signing and approving checks. Warehouse personnel should be in charge of storing and keeping track of inventory. With clearly assigned responsibilities, all important jobs get done.

In processing transactions, smart management separates three key duties: asset handling, record keeping, and transaction approval. For example, in the case of AMEX Products, separation of the duties of cash handling from record keeping for customer accounts receivable would have removed Melissa Prices incentive to engage in fraud, because it would have made it impossible for her to have lapped accounts receivable if another employee had been keeping the books. Ideally, someone else should also review customer accounts for collectability and be in charge of writing them off if they become completely uncollectible. The accounting department should be completely separate from the operating departments, such as production and sales.

What would happen if sales personnel, who were compensated based on a percentage of the amount of sales they made, approved the company’s sales transactions to customers? Sales figures could be inflated and might not reflect the eventual amount collected from customers. At all costs, accountants must not handle cash, and cash handlers must not have access to the accounting records. If one employee has both cash-handling and accounting duties, that person can steal cash and conceal the theft. This is what happened at AMEX Products. For companies that are too small to hire separate persons to do all of these functions, the key to good internal control is getting the owner involved, usually by approving all large transactions, making bank deposits, or reconciling the monthly bank account.

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