An Internal Control Checklist for Small Businesses

Protecting Your Small Business: Essential Financial Controls Against Fraud

The latest data confirms that small businesses remain highly vulnerable to financial fraud. The 2024 Association of Certified Fraud Examiners (“ACFE”) Report to the Nations reveals that small businesses (those with fewer than 100 employees) still experience the highest median loss from fraud, averaging $154,000.

The types of schemes that disproportionately impact smaller companies compared to large enterprises continue to include asset misappropriation schemes, such as skimming and check and payment tampering. Common areas of financial fraud include billing, payroll, expense reimbursements, and cash larceny.

A key finding from the ACFE report is that nearly half of all fraud incidents are directly attributable to a lack of internal controls or the override of existing controls. This highlights the critical necessity for small businesses not only to implement but also to enforce strong financial controls diligently.

What Are Financial Controls?

Financial controls are the internal processes and procedures designed to safeguard a company’s assets, ensure the reliability of its financial records, and prevent/detect fraudulent actions.

Businesses implement these controls—whether manually or through accounting software—to minimize the risk of financial mistakes, theft, or embezzlement. Think of financial controls as your business’s safety net, providing the structure and checks needed to thwart internal and external fraud. Unfortunately, many small businesses lack the specialized knowledge, time, or trained personnel required to implement these proper safeguards.

While no measure can guarantee the complete elimination of fraud, having these fundamental financial controls in place is the most effective way to mitigate risk exposure and protect your bottom line.

Six Critical Financial Controls for Small Businesses

Here are six updated, essential financial controls every small business should prioritize:

1. Implement Segregation of Duties

This is the single most important control to prevent fraud. No single employee should have control over all parts of a financial transaction. Split responsibilities among multiple people for key functions like:

• Approval of a purchase.

• Recording the transaction in the accounting system.

• Custody of the assets (e.g., handling the cash or writing the check).

For example, the person who approves payroll should not be the one who issues the paychecks.

2. Perform Independent Bank Reconciliation and Review

Have someone other than the person who handles cash or processes payments regularly reconcile the bank statements (ideally, monthly). This independent reviewer must examine the cancelled checks/images and the original bank statements for suspicious transactions, duplicate payments, or unauthorized wire transfers. The business owner or a manager should also regularly review the summary reports.

3. Establish Physical and System Access Controls

Restrict who has access to physical assets and financial systems.

• System Access: Grant employees log-in access only to the data and functions pertinent to their roles (Principle of Least Privilege). Your bookkeeper shouldn’t have access to HR files, and a salesperson shouldn’t be able to edit vendor master files.

• Physical Security: Secure sensitive documents, check stock, and inventory in locked areas. Designate a trusted employee to manage and track inventory movement (receipts and shipments).

4. Keep Business and Personal Finances Strictly Separate

Never co-mingle your business and personal finances. This is a common and dangerous mistake, especially for startups. Ensure you:

• Use dedicated business bank accounts and credit cards for all company transactions.

• If you loan money to or from the business, document it formally with a promissory note that specifies clear terms, including interest and a repayment schedule. This is crucial for both legal and tax purposes.

5. Scrutinize and Approve All Outgoing Payments

Implement a strict payment approval process to prevent fraudulent billing schemes and expense reimbursement fraud.

• Require two signatures on checks above a certain threshold.

• Compare every payment against the original invoice or contract.

• Watch for red flags, such as duplicate invoice numbers, new vendors that lack proper vetting, or payments to vendors at employee home addresses.

• All expense reimbursements must be supported by original receipts and approved by a supervisor.

6. Implement and Monitor a Confidential Reporting System

The ACFE report consistently finds that tips are the most common method for detecting fraud.

• Establish a method for employees, vendors, and customers to report suspicious activity anonymously and without fear of reprisal (e.g., a locked box, an anonymous email address, or a third-party hotline).

• Communicate clearly to all employees that the company has a zero-tolerance policy for fraud.

Protecting your small business from fraud isn’t a one-time task—it’s an ongoing commitment to diligence. By implementing these six essential financial controls, you significantly reduce your vulnerability to the most common (and costly) schemes affecting small companies today. Don’t wait until a problem surfaces; take action now to audit your current procedures, segregate key duties, and secure your financial future. The security of your business depends on it.

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