A strong internal control structure within an organization serves to protect company assets from fraud, ensure financial information is complete and accurate, and produce reliable financial statements. While internal controls are the responsibility of all employees, many times a top finance employee becomes solely responsible for their oversight. Creating a supervisory or audit committee can have a profound impact in strengthening a company’s control environment and assisting with internal control oversight.
While large organizations with independent boards have the capacity and resources to maintain an active committee comprised of outside individuals, smaller organizations can be creative in their implementation. Large organizations utilize committee member’s outside perspective as a catalyst for inquiry and discussions to improve policies, procedures and controls, and potentially detect fraud. This same concept can be applied to smaller organizations by using a small team of management employees to periodically review and test detailed financial transactions and control procedures. The size of your organization does not preclude you from implementing an active and effective Supervisory or Audit Committee.
Audit Committee Benefit
Regular committee testing of policies, procedures, and internal controls, serves to protect both the company and employees, while detecting potential errors on a timely basis. The committee members should be provided unobstructed access to reports and reconciliations of the company, and also have the opportunity for inquiry of employees to understand the current procedures. The key for a successful committee is a comprehensive action plan for each year. Having a clearly defined set of procedures and deadlines establishes expectations, timelines and goals for committee members and accounting personnel. Examples of documents to review and procedures to perform are as follows:
- Review of bank reconciliation preparation and approval
- Examination of customer payments and cash receipt procedures
- Review of cash disbursement procedures and vendor listings
- Supervise inventory and fixed asset observations
Committee members should always be aware of possible conflicts with segregation of duties among accounting or control procedures, ensuring that no one person has complete control over any transaction. An additional step needed in the committee’s arsenal is the inquiry of non-management employees. Often times, their responses align more with actual practice versus the company’s written policies and procedures. These interviews can delve deeper into the company’s culture and communication and serve as a contrasting perspective to management’s perception. This allows for the committee to obtain a comprehensive understanding of the company.
Not all committee members need to have a high level of accounting knowledge. With a basic understanding of internal controls and regular training to develop and hone testing techniques, non-financial management employees can perform this important layer of oversight. The company’s external CPA firm can produce and present a training program for the committee, given their experience and knowledge of the company’s control structure. Working closely with the CPA firm can result in a high-quality and comprehensive action plan for the committee.
For some companies, an active supervisory or audit committee is cost or time prohibitive. In these cases, companies could consider engaging an independent CPA to complete regular (often quarterly) procedures to serve in a supervisory capacity. These services can be customized to be affordable and will provide the company benefits that exceed the costs.