A recent kerfluffle with Groupon illustrates several reasons companies need a firm handle on internal controls. The company recently admitted to several financial sins in its 10k filing with the SEC including not having adequate policies and procedures to:
- properly close their books on time,
- document their work papers, including significant estimates, and
- allow for proper review and approval of such work.
The weaknesses in Groupon’s controls over financial reporting make you wonder about the state of their controls required to safeguard assets.
Establishing internal controls
All controls should be established in a company’s infancy and refined as the business grows. Waiting for a convenient time (that never comes) to implement good controls is usually a recipe for disaster. This is a job best done by a Controller with internal controls experience and the tools, templates, policies and procedures to get it done quickly, so you don’t have to recreate the wheel. Too often, we are called in to save the day when the company has hit financial shoals. In these instances, the cost is many times greater than what it would have been to simply do the job right at the outset.
Internal controls in privately held companies
Internal controls over financial reporting are as important in private companies as they are in public companies. They give users of your financial statements, such as lenders, investors and customers, confidence in your numbers and disclosures. If they feel insecure about your financial statements, getting credit or capital financing from them could be hampered.
Good closing procedures include accounting schedules to substantiate the balance sheet accounts and perform an analytical review of the income statement, all of which should be followed by a review of the work papers by a qualified person. Proper closing procedures mean nothing if the information comes in after a deadline. While drawing up internal controls, we are careful to include procedures that insure an accurate cutoff of sales and expenses for the period. Information supporting transactions must flow to accounting personnel with sufficient time for them to perform the closing of the books.
Let’s talk about your internal controls.