Don't Lose Millions Before You Know It

How Poor Internal Control Will Ruin Your Business

Chief Egbuzie is a relatively successful businessman, dealing in power generating sets. His business was based in Lagos, but he decided sometime ago to open an outlet in Port Harcourt. He transferred one of his supposedly trusted staff to Port Harcourt to run that outlet. Just a few months down the road, he visited Port Harcourt to review the progress of the new branch. Then the shock. The review showed that funds totaling close to three million Naira had already been siphoned out of the business from this branch. In a sense, he was lucky to have discovered this relatively early, but not much could be done to recover the lost money.

For Mr Johnson, the experience was not much different. His pharmaceutical business was thriving, though he was always actively involved, monitoring the operations personally. Then he decided to diversify a bit and began to import used electronics products which he considered more profitable. That took his attention substantially away from the pharmaceutical business, as he had to travel occassionally and spent time to scout for and buy products in Europe. As there was no proper accounting and control system in place, this business had required his personal involvement and policing. He was soon to realise that the money invested in the pharmaceutical business had substantially 'evaporated', as the business went on a downward slide.

The experience of these two business people is commonly replicated with many small businesses. Sizeable sums of money are lost all the time to staff who take advantage of the porous internal systems to sap the business of its funds. Many of these fraudulent staff believe they are accumulating the capital to start their own businesses and will not mind achieving this goal at the detriment of their employer. While it is possible to take precautions when recruiting staff, the truth is that selection errors occur all the time. The result is that dishonest people still get engaged. Besides, those in the gray area between honesty and dishonesty may find very weak control systems too tempting. Even innocent errors can cost the business dearly and can easily go unnoticed in a poorly controlled business environment.

The high risk of serious abuses and failures that can cost you millions of Naira and this makes a compelling case for instituting proper internal controls.

What are internal controls?
We will avoid being technical. The bottom line is that the structures and processes of a business can be designed in a away to protect its assets and resources by eliminating or at least minimising the opportunities for abuses and errors, especially by one person. Internal controls can, in lay terms, be called checks and balances. Some may be controls of a physical nature e.g. the locks to a warehouse, others will be procedural e.g. a requirement that two officers respectively control the different locks used for that warehouse (dual control). Invoicing and cash collection procedures, delivery of products, stock control, book-keeping, subsidiary records, reconciliations, etc may form part of a business' internal control system. The details for a particular business will depend on what it does. When implemented, the effect is that it becomes more difficult to carry out abuses without collusion of more than one person. If controls work well, abuses and errors will also be detected more promptly if and when they do occur, leading to more timely action which could save the business. As is obvious, a sustained abuse or error pattern can indeed destroy a business.

Designing a system
It must be admitted that designing an internal control system is more difficult for a small business. The reason is that due to size, separation of functions (a major part of internal control process) is relatively difficult to institute as multiple functions are combined in the few available hands.

Having said this, the challenge is to find ways to ensure counterchecks and controls. Besides, controls cover various aspects of the business. Take an example. Many telecom products marketers have been attacked and robbed in their outlets, with losses sometimes running into several millions of Naira. What is the place of internal control in this? An internal control system will consider the following: physical security in the outlet (location, burglar proofs, safes, image capture, security staff, etc), limits as to the value of stock to hold at a time in the outlet, how payments are made by customers (for instance, whether paid directly into the bank account), how much cash is accumulated in the outlet before banking, the need for insurance cover and for what value, police cover, etc. A good internal control system will anticipate problems and design controls to eliminate lapses and discourage attacks on the business. It will also implement measures to quickly detect problems and mitigate their possible impact.

Who Designs?
You can design your system, provided you are able to institute measures that should reasonably protect the business. To ensure you get good results, it will be advisable to have an accountant design your system for you. They are trained to do this kind of work and the cost of engaging one will definitely be money well-spent. Think of the fact that no big company operates without these professionals whose valuable contributions to business has never been in doubt. The millions you may lose to weaknesses that could otherwise be plugged would be substantially saved if you invest a fraction in paying for a good internal control system.

Will internal control absolutely guarantee your business from loss? Certainly not, just as your locking your gate at night may not absolutely guarantee your safety. However, you are definitely better secured with locked gates.

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