Art of Accounting: I Try to Not Let Poor Internal Controls Keep Me Awake
IMGCAP(1)]My last column addressed the importance of controls when trying to get a client. But it is also important to retain the client. A good system that is not monitored is a sure way to not only lose the client, but be kept awake at night.
If you have been around long enough, you’ve experienced a theft at a business or not-for-profit organization. For nearly ever fraud I have seen, the slightest effort would have thwarted those frauds. Nowadays the only frauds I come in contact with are new engagements, where I try to quantify what was taken. When I was more active I used to worry about whether my clients’ controls were adequate to protect them. If they weren’t or weren’t followed the right way, or weren’t used at all, then problems developed. Then I had a problem, even though I might have set up the “best” system ever.
The problems develop not because of bad controls, but because of a failure of implementation. Most systems work, even if they are not so good. Bad systems work well if they are overseen and the results are monitored and reviewed. Of course, it is always best to have great systems, but the best system that is not followed or overseen becomes no system.
One of the purposes of a system is deterrence. It sends the message that defalcations will be discovered quickly. Many times just the knowledge of the system is enough to prevent an otherwise honest person from crossing the line. Without the threat of being discovered, there’s a temptation that I believe creates culpability for the overseer. In many instances a small mistake that created anxiety leads to an actionable second “mistake” that really becomes an “on purpose,” and that nondisclosure gradually leads to further inappropriate activity.
As an advisor and someone who also sets up systems and performs forensic investigations on suspected frauds, I believe the most important step in the process is to implement diligently and regularly the monitoring required by the system. I no longer set up a system and go home. I insist that my firm remain engaged to make sure the implementation becomes part of the client’s culture and routine activities. If a client doesn’t want to do that, then we usually pass. We don’t want to deal with the problems that eventually develop. Because when they do, I do lose sleep, and that’s not for me.
Edward Mendlowitz, CPA, is partner at WithumSmith+Brown, PC, CPAs. He is on the Accounting Today Top 100 Influential People List. He is the author of 24 books, including “How to Review Tax Returns,” co-written with Andrew D. Mendlowitz, published by www.CPATrendlines.com and “Managing Your Tax Season, Third Edition,” published by the AICPA. Ed also writes a twice-a-week blog addressing issues that clients have at www.partners-network.com. Art of Accounting is a continuing series where Ed shares autobiographical experiences with tips that he hopes can be adopted by his colleagues. Ed welcomes practice management questions and can be reached at (732) 964-9329 or firstname.lastname@example.org.