As the headline-grabbing accounting scandals of the past few years have shown, executives can no longer afford to be in the dark about the financial workings of their own companies.

Of course, no company leader can be expected to know all the details of every transaction. But they can be expected to review and understand the company’s financial statements - and when confronted with unfamiliar concepts, to seek the advice of the company’s accounting executive.

High-level leaders should also have a basic understanding of the financial principles and metrics that affect their business, along with an awareness of new regulations and changing financial environments. Finally, business leaders are accountable for the implementation of proper financial controls within their companies, as well as the authorization of the necessary resources to maintain them.

Policies and rules to live by

Having budgets and cash projections in place is a critical first step to identifying major discrepancies and investigating them early on. Double bookkeeping systems should always be used, with approvals required on all journal entries. Records should be kept up-to-date and balanced.

All companies should have clear policies in place for credit approvals. Credit files should be kept current and credit checks conducted regularly.

Sales orders should be approved for pricing, terms, credit, and account-balance limits. All orders should be recorded on pre-numbered forms that can be accounted for easily. And invoices should be recorded promptly and compared against shipping documents.

Monthly statements for outstanding balances should be reviewed by the owner or the company’s accounting executive, and customer account write-offs or other adjustments should also require authorization from above.

All vendor invoices should match purchase orders and undergo review for correctness in quantities received and prices charged, as well as whether any available discounts have been applied.

Receiving and disbursing cash

There are many procedures that can help protect the cash flowing into and out of an organization. Here are a few of the fundamentals.

• A responsible manager other than the person maintaining account receivables should open mail and pre-list all cash receipts. All checks should then be stamped with the restriction “for deposit only” before turning them over to the bookkeeper.
• Cash receipts should be deposited intact on a daily basis and posted promptly to appropriate journals.
• All disbursements except for petty cash should be made by pre-numbered checks, and all numbers should be accounted for.
• Checks to be signed should be accompanied by supporting documents, processed invoices, and purchase orders, and supporting documents should be properly marked as “paid” to avoid duplicate payments.
• Checks payable to “cash” should never be permitted.
• A review process should be in place for bank statements and cancelled checks.
• Bank reconciliations should be prepared and reviewed monthly for all accounts.
• Petty cash disbursements should be supported by approved vouchers, with predetermined limits on amounts. Cash should be kept in a safe place, with limits on those receiving access, and amounts periodically counted by someone other than those in control.

Beyond basic accounting procedures

Establishing financial controls also requires addressing the people factor. Hiring processes should include diligent screening and background checks. Accounting staff should be cross-trained and responsibilities divided in order to institute a balance of controls. And all employees should be required to take vacations. Mandatory time off means that accounting tasks must be rotated, making it more difficult for employees to hide possible wrongdoings.