Monitoring Your Control System
After you’ve designed, documented and implemented your new control system, you need to make sure it is operating as designed. It is not enough to merely ask and/or obtain verbal assurance that someone has correctly performed a control procedure. You need to implement specific, ongoing monitoring and testing processes.
Also, if you don’t test your system, team members will realize that the new procedures and controls are not being monitored — and compliance will drop dramatically.
Auditors use formal checklists, sampling procedures and mathematical models to measure the adequacy of various control systems. That level of testing is probably far beyond what you need, but steal a page from the auditor’s toolkit and be prepared to periodically monitor — and sporadically test — your control system.
When designing your system, keep in mind the following questions to ensure that you are creating it with a testing procedure in mind:
- Is there another existing control that supplements or can act as a check or balance of this control? If so, how much can you rely on it?
- What objective proof will you need to determine that employees are following this control procedure? For example, can you:
- Review the security system alarm log (instead of asking, “Do we always set the alarm at night?”).
- Verify that the file cabinet that holds your checks is locked each night as you leave (instead of asking, “Do we always keep all of our blank checks locked up?”).
- Observe the desk of an employee who has just left in a hurry to pick up a sick child at school to make sure all critical documents were placed in a locked drawer for safekeeping and that the drawer key was not left lying on the desk (instead of asking, “What do you do with critical documents and keys when you leave the office?”).
- Check several transactions and the ending balance on a bank statement against the detailed reconciliation prepared by your bookkeeper (instead of asking, “How are you doing on the reconciliations?”).
These checks and observations are necessary because employees, when asked directly, tend to want to impress you with answers you want to hear.
Conversely, if an employee is doing something dishonest, that employee is even more likely to give you skillfully crafted, reassuring answers.
Don’t —
- Announce your checkup intentions in advance to your employees.
- Put your monitoring activities on an in-office calendar that can be viewed by others.
- Perform checkups in a predictable manner. (“Yeah, the boss comes by every Tuesday around 1 o’clock to check on product deliveries and paperwork, so we’d better get the ruined materials and beer cans cleaned up before she shows up.”)
Do —
- Be calm and quiet, ask questions and obtain clarification.
- Think through in advance how you will respond to the (inevitable) disappointments or violations you’ll probably encounter.
- Resist the urge and make changes, modifications and decisions on-the-spot when you find a violation. Make them only after gathering and fully considering all of the facts.
- For minor violations, be prepared to document your findings, clarify your expectations and issue a documented warning.
- If you suspect a major problem, don’t sweep it under the rug. Give it your immediate attention.
Modifying Your Control System
As you monitor your results, be prepared to modify your control system. Some controls may not be that effective, and you may discover some underlying problems or hurdles, such as:
- Employees who are unclear about the procedures or the reasons for them
- Procedures that are too time-consuming
- Procedures that involve too many steps
- Procedures that cost more to implement than you originally anticipated
- Procedures that conflict with other company goals
- Procedures that are forgotten or overridden when other circumstances or stressors come into play
- Other justifiable reasons to resist specific procedures
Instead of simply discarding the control because it is encountering some turbulence, see if you can resolve the underlying problem. If your first attempt produces less than desirable results and you’re stumped about what to do next, use feedback from your team members and professional advisors to see if the control can be modified or even re-invented.
Keep focusing on the asset you are trying to protect and on the risk you want to avoid or minimize. If the asset is worth protecting, you need a control.
Logic, creativity and perseverance will provide you with a smoothly functioning set of controls. You will eventually wonder how you ever functioned without these specialized procedures.
In addition, when you walk into someone else’s business, you will begin to notice the difference between your controlled operations and their out-of-control operations. You will then know that you have moved your business one giant step closer to safety and financial security.
Diane C.O. Gilson, CPA, CIA, is a Certified QuickBooks ProAdvisor and MasterBuilder ProAdvisor, author, trainer and construction accounting coach, as well as a frequent speaker at The International Builders’ Show and The Remodeling Show. Her firm, Info Plus Accounting PC/CPA, offers bookkeeping and support services to help construction companies do more accurate and timely job costing and run better management reports. Contact Gilson via e-mail, or call her at 734-544-7620.
Earlier Articles in this Series
- To read, “Protecting Yourself From Fraud: An Introduction,” published Dec. 15, click here.
- To read, "Are You at Risk? Protecting Yourself From Fraud," published Jan. 26, click here.
- To read, "Good Self-Defense Strategies Will Help Protect Your Business From Fraud," published Feb. 9, click here.
- To read, "Lifestyles Can Be Red Flags: Know the Warning Signs of Fraud," published March 1, click here.
- To read, "Strange Behavior May Be Tip-Off to Possible Fraud ," published April 5, click here.
- To read, "Review Your Accounting Reports to Protect Yourself From Fraud," published May 10, click here.
- To read, "Do Your Financial Statements Add Up? If Not, Be Alert to Fraud," published June 7, click here.
- To read, "Protecting Yourself From Fraud: Watch for Warnings Signs From Others," published July 5, click here.
- To read, "Get Smart — Initiate Controls to Protect Yourself From Fraud," published Aug. 16, click here.
- To read, "How to Implement Controls That Will Help Protect You From Fraud," published Nov. 22, click here.
Has Your Company Been Victimized by Fraud?
Gilson is writing a book to help residential construction business owners protect their companies from fraud, and your experiences could help someone avoid a similar nightmare. She is seeking volunteers to share anonymous, candid stories of what they experienced and learned. If you would like to share your story, e-mail Gilson.
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