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By Nick Zagacki, CPA

For many small businesses, automation is a great way to improve efficiencies, monitor the business’s progress, prepare financial statements, identify sources of income, and keep track of expenses. But when using business software, it is important to setup a chart of accounts. The chart of accounts is a listings of names and unique numbers for each account so that the accounts can be identified and made available for recording transactions in the general ledger. With properly set up accounts, a business can easily prepare accurate financial statements on demand. Not only are chart of accounts needed to ensure the financial information in the system is accurately captured, internal controls are needed too. Below are a few types of useful internal controls to set up for your business software.

Reconciliations

Reconciliations are an effective way for confirming the reliability of a company’s accounting records by regularly comparing balances of transactions. A reconciliation may be prepared on a transaction, daily, monthly, quarterly, or annual basis. For example, when the purchasing department buys new inventory there are automated reconciliations that take place before payment is made. After the inventory is received and receipted into the system, the purchase order, invoice, and receipt are reconciled (also known as a three-way match). If no issues are identified payment will be sent to the vendor. If a discrepancy is identified, the system will delay payment and highlight the transaction for review.

System Role Assignments

Whether you are using QuickBooks or SAP, assign roles to all software users that limit their access in the system to only information that is needed to effectively perform their job. This ensures that no single employee can fraudulently initiate transactions that are intended to take company assets. This will also help reduce unintentional mistakes by maintaining proper segregation of duties.

Edit and Validation Checks

Both financial and nonfinancial data in the system should have edit and validation checks performed. This is the automated process of ensuring that the data in the system is accurate. Some examples are a limit check, which ensures a particular transaction does not exceed the set threshold; a duplication check, which ensures transactions do not process twice; and a completeness check, which ensures the data/information within the transaction has all fields filled in (i.e., customer number, product number, shipping address, etc.).

The above are only a few automated internal controls. There are many other controls, both automated and manual, that can help safeguard assets and produce accurate financial data.

For additional advice that may help you with your small business, check out the PICPA Small Business page.

Nick Zagacki, CPA, is currently a senior associate in the advisory practice at KPMG in Philadelphia.