Internal control systems and effectiveness in organizations

Jamona.com's internal control procedures have the advantage of swiftness, since only basic operations are being conducted, but that requires complete trust between the Office Manager and the people in the Accounts Payable Department. Since verification procedures for these operations do not exist, the accounting personnel might be engaged in fraudulent maneuvers or might simply make mistakes that could easily be spotted by someone outside the department.

Another issue is the adequate segregation of accounting duties. The person who prepares accounts payable checks should not prepare the organization's bank reconciliation. Since, in Jamona.com's case, the Accounts Payable Department is responsible for writing, signing and sending checks and for reconciling the bank statement, that could prove a problem if there is even the slightest suspicion of fraud. Creation of fictitious accounts payable might also arise, if proper control methods are not implemented.

For instance, all purchases of goods and services must be approved in advance by authorized personnel. The person who should approve the purchase and accept charges for the goods and services is the one with the financial responsibility for the department, in the case of Jambona.com - the office manager. It is the also the responsibility of the office manager, as the representative of the purchaser to ensure that the necessary information is submitted completely, accurately, and timely to the Accounts Payable Department. Thereafter, the Accounts Payable Department must process vendor invoices in a timely, accurate, and complete manner to the satisfaction of the vendor and of the purchaser, at the same time.

A copy of the purchase order should be available to the Account Payable Department until an invoice and receiving copy of the purchase order is received in Accounts Payable. This way, the AP Department knows exactly what expenses has to cover and is able to make accurate plans about the distribution of cash. These pending purchase order files should be reviewed from time to time (15 to 30 days is an appropriate figure, depending on the size of the business).

It should be the job of the Office Manager or his appointee to check whether there are any differences between the contents of the purchase order and the contents of the package received from the supplier. The purchase order should also match the contents of the invoice, since this is the actual document whereon payment is based.

Once these steps (which are the responsibility of the Office Manager) are complete, the designated accounting personnel in the Accounts Payable Department should take the following measures: they should check that the information contained on the invoice is accurate and consistent with the requisition There should be no confusion around invoices and packages from the same supplier. There may be cases when the supplier deliver a certain product and the receiver pays an invoice related to another product that the supplier is unable to deliver. Consequently, litigation may arise.

The accounting personnel should also identify any discrepancies in the quantities ordered and quantities received. Another area where differences may appear is prices. Discrepancies in quoted prices and actual prices charged should also be identified. After all these verifications are completed, if all information is consistent with the purchase order and the actual requisition, the Account Payable should ask for a confirmation from the Office Manager. For one reason or another, the Manager may want to pay a certain invoice a bit later or not pay it at all, even facing the risk of penalties. The Accounts Payable Department should not hurry and pay for the merchandize in the invoice before a person with proper authority allows for the payment to be concluded

Although it may take a little more time, such an authorization could prove important if, for some reason, the company does not have enough money in its bank account, for instance. The Office Manager can decide which invoices to pay more rapidly, depending on their due date, total value and relationship with the supplier. Inconsistent information should be forwarded to the Office Manager along with the requisition and purchase order for further analysis and/or clarification.

The Purchase Department (which should not be the same as the Accounts Payable Department) should assign a code to each purchase order and forward it to the AP Department, which should place it in a pending file until the receipt of the invoice. Once the invoice is received, the accounting personnel should check if it matches the pending purchase order. The data introduced in the accounting system should roughly include the following: the current date, the invoice date, the purchase order number, the General Ledger account number and the amount of the actual invoice.

The check must be completed and any supporting documentation should be attached and forwarded to the Office Manager for approval before the actual check can be processed or made. As for the status of the check, the Accounts Payable Department should be contacted if there are any difficulties and questions. Any supporting document might also be mailed with the check by the AP Department, should the requestor make such a demand.

Various problems regarding checks might arise. For instance, a check is deemed invalid and voided if there is an error in the payee amount, if the error occurred during the printing of the check, if a duplicate payment has been made, if the cancellation of the payment is requested, or if there is any other reason for which the check cannot be sent to the payee. The procedure should be as follows: immediately after determining that a check should be voided, the responsible person should mention it on the face of the check (write "VOID," for instance), write a brief explanation regarding why the check was not issued on the stub of the check, and remove or cut the signature from the check. A controller has to process and journalize the checks voided by the Accounts Payable Department.

Adequate segregation of accounting duties is an excellent way of fighting against fraud. The person who records cash receipts (including checks) should not also record the accounts receivable activity. The person who prepares or approves payroll should not be the one to distribute payroll checks. The person who prepares accounts payable checks should not prepare the organization's bank reconciliation.

The reconciliation of the bank statement is an important operation, since it helps detect total outstanding checks added incorrectly, total deposits in transit added and bank balance written down incorrectly, failure to record all items, failure to record a check or deposit or incorrect recording of an amount. Since reconciliation of the bank statement also helps detect fraudulent maneuvers accomplished by AP employees, for instance, this process should be supervised by the Office Manager or his/her appointee, if total segregation of duties is not possible.