Although we may not still feel the pressure of the worst recession since the Great Depression, we are still in a challenging competitive market. Many companies are still learning how to more diligently improve operations and profitability. So, what can business professionals do? I believe it is time to get back to basics. This is the time for companies to look inside and ensure that the fundamentals of running their business are strong. At a minimum, management should look at the following four areas.
Internal Control Procedures
This is the time that companies should revisit the quality of their internal control procedures and ensure that they are appropriate for the current working environment. Strong controls ensure that company assets are protected from theft and fraud (a significant risk in today’s economy!), and contribute to timely, accurate financial reporting. As companies downsize to reduce their costs, there is increasing risk to organizations as a result of poorly designed controls and non-compliance with existing control procedures. It is important that management address areas where such control procedures should be modified. For example, there are certain operating activities that should not normally be performed by the same individual in order to avoid conflicts of interest (one example would be where the same person writes checks, signs checks, and reconciles bank accounts). In small and mid-size companies, downsizing has caused incompatible functions to be performed by the same individual or department.
In addition, management should review the control environment to ensure that not only are controls in place, but that the controls would be effective even if they were performed as designed. An example of a control that should be performed is that a supervisor initials an invoice before it goes out to the customer. An ineffective application of that same control is that the invoice bears the initials of the reviewer, but is mathematically incorrect. The control would only be considered effective if the initials were on the invoice and the invoice was correctly prepared and recorded in the books and records.
Management should perform a critical self review of its control procedures and make appropriate changes to ensure that the company is not susceptible to fraud or theft. Management should consider bringing in outside professionals to perform audit procedures on the internal control system to identify critical weaknesses and recommend improvements.