Overcoming Internal Accounting Controls Challenges: A Guide for Small Businesses

small business paperwork needing internal accounting controls

Having solid internal accounting controls is important to make sure your company’s financial operations run smoothly. These controls not only reduce the risk of fraud or errors but also keep your assets safe from loss or misuse. Internal controls also give you reliable financial data for making smart management decisions. So don’t forget to these safeguards in place!

There are three main categories that internal controls fall into:

  1. Preventative – stop an error before it occurs
  2. Detective – detect an error after it has occurred
  3. Corrective – actions after an error is found in the detective control process

Here are some examples of types of actionable internal controls that fall under these categories.

  1. Preventive Controls
  • Create a separation of duties
  • Use dual signatures
  • Physically secure assets
  • Have well-documented policies and procedures
  1. Detective Controls
  • Perform reconciliations
  • Schedule audits from outside accounting professionals
  • Perform internal audits
  1. Corrective Controls
  • Updates to policies and procedures
  • Disciplinary actions
  • Software updates

As a small business owner or manager, you have a lot on your plate. Creating and implementing an accounting system with internal controls provides a way for you to have checks and balances. Here are some examples of internal control challenges you could face in a small business and how to overcome them.

Accounting Controls Challenges for Small Businesses

Challenge 1: Inadequate internal controls

accounting balance sheet, financial statement and calculator

Small businesses operate with limited resources which makes it difficult to implement effective internal controls. When you ensure proper segregation of duties and establish thorough procedures, you strengthen financial practices and enhance overall operational efficiency.

Recommended resolution: Invest in hiring or consulting with a qualified accountant to ensure that your internal control systems are up-to-date and effective. An accounting firm can provide you with a guide to make it easier to keep up on internal controls systems and stay on track.

Challenge 2: Lack of understanding of financial regulations

large binders with accounting compliance, regulations, small business finance laws

Many small business owners, especially those without a finance background, often find themselves unfamiliar with intricate and complex financial regulations imposed by government agencies. This lack of awareness can often lead to challenges and uncertainties when it comes to maintaining compliance and ensuring accurate financial records. In this case, it becomes crucial for small business owners to seek guidance and resources that can help them navigate and understand these regulations to effectively manage their financial operations.

Recommended resolution: Consult with an experienced tax advisor or CPA to ensure that they are compliant with all relevant financial regulations and have a secure accounting system in place.

Challenge 3: Manual processes for recording transactions

business owner with paper receipts, manually entering accounting paperwork

Many small businesses depend on manual processes for recording and tracking financial transactions. But relying on manual methods can cause an increase in errors or omissions, jeopardizing the accuracy and integrity of the financial records maintained by these businesses.

Recommended resolution: Invest in electronic filing systems and software solutions designed to automate accounting tasks such as financial reporting, which will reduce the risk of errors and improve accuracy.

More Ways to Improve Internal Accounting Controls

Small businesses work with limited resources for protecting financial statements, sensitive data, and physical assets. So having an organized and well-kept accounting system is important for a small business to not only stay afloat but to thrive. Here is a list of more helpful ways that your small businesses can improve internal accounting controls.

  1. Large Transaction Control: As a preventive controls procedure, it is recommended to require the approval of senior management for large transactions. This ensures that significant financial decisions are carefully reviewed and evaluated by experienced leaders who possess a comprehensive understanding of the organization’s goals and risk tolerance. By implementing this measure, companies can enhance transparency, accountability, and risk management in their financial operations.
  2. Separation of Duties Policy: By separating certain tasks to different individuals in a company you can ensure the integrity of your bookkeeping process. This internal controls policy works by restricting employees’ access to only one stage, preventing any unauthorized interactions, and maintaining a secure and streamlined workflow.
  3. Internal Audits and Reviews: These are a type of detective control to help you find errors and maintain compliance with applicable laws. Have a qualified staff member perform regular audits and reviews of financial records and reports. During these reviews make sure to have a checklist of necessary documentation to support the burden of proof in the event of an IRS audit.
  4. Account Restrictions/Access Controls: Implement proper access restrictions and limit access only to authorized personnel for your account information. Carefully monitor the accounting control systems for any unauthorized or suspicious activity to safeguard financial data and prevent potential security breaches.
  5. Double-Entry Accounting System: Adopt a double-entry accounting system with independent accounts for debit and credit transactions to keep account balances in check. The system is tracked through trial balances to ensure that the total debits match the total credits. This process also helps identify errors in accounting records.
  6. Banking Authentication Access Controls: Add an extra layer of security for your financial transactions during online banking activities with two-factor authentication. By implementing this additional security measure, you can enhance the protection of your sensitive information and significantly reduce the risk of unauthorized access to your accounts.
  7. Preventative Controls to Reduce Fraud: Implementing an internal preventive controls policy that mandates regular vacations for executives helps minimize the chances of employee fraud or misuse of company funds and assets. When the executive is on vacation and hands off their workload to peers their work is inspected which reduces the chance of embezzlement of funds. This measure not only enhances financial security but also ensures transparency and accountability within the organization.
  8. Reduce Manual Entry: Automate data entry processes as much as possible, with manual override when necessary. This is an example of a preventive internal controls procedure put in place to reduce human error and improve accuracy in record-keeping.
  9. Third-Party Accounting Audits: Perform regular independent accounting control audits by outside professionals to verify the accuracy of financial statements. This is a form of a detective controls system you can put in place to identify any fraudulent transactions.

Benefits of Third-Party Auditing of Internal Controls

For a small business, having a third-party audit of internal accounting controls can be an invaluable asset. An independent third-party audit helps provide peace of mind for those involved in running a small business. Here are some of the main benefits of having a third-party review your accounting systems and records.

Catch Errors with Risk Assessments

This helps you to identify any potential areas of financial weakness or mismanagement before it becomes too late. Risk assessments by an outside source can help to ensure that any accounting errors in financial reporting are discovered are addressed quickly, reducing any long-term potential losses.

Provide Unbiased Review

Physical audits performed by certified accountants outside of your company provide an unbiased and independent view of the accounting practices. By performing regular audits, management can be sure that their efforts to maintain accurate financial records and internal controls are effective, and at the same time provide investors with confidence in their commitment to sound fiscal practices.

Identify New Ways to Improve Internal Operations

Accounting control audits can assist management in determining whether processes are being followed correctly or if there is room for improvement. The audit process itself also adds efficiency and security measures throughout the operation. This is beneficial when dealing with sensitive data such as bank statements, customer records, or employee information.

All in all, having an experienced accounting firm audit your internal accounting control systems is invaluable in helping manage risk and promoting good governance over financial activities within your organization. Provide assurance to external stakeholders — creditors and investors — that the accounting statements are reliable and trustworthy. Contact the certified accountants at Simply Counted to get us on your schedule for internal control audits. We can also help with business start-up operations by helping you plan and implement a strong internal control framework for your new business from the get-go.

About the Author

Diana Kasza

President of Simply Counted Business Services, Inc.

Diana is an Accredited Business Accountant/Consultant with more than 25 years of experience. She is a graduate of Ferris State University and an active member of Toastmasters International.

Was last modified 16 October 2023 by Diana Kasza