Internal Controls for Small Businesses: Preventing Errors & Fraud in Financial Reporting

Preventing Errors & Fraud in Financial Reporting

Louis Van Der Westhuizen  Principal at Impact Risk Advisors             www.impactriskadvisor.com

For many small businesses, internal controls might sound like something only large corporations need. But in reality, even simple internal controls can make a big difference in preventing financial errors and fraud and they’re often easier to implement than you think.

Why Internal Controls for Small Businesses Matter

Internal controls are processes and procedures that help ensure financial data is accurate, assets are protected, and operations run efficiently. Without them, businesses risk misstatements in their financial reporting, missed red flags, and even fraud.

In small businesses, where the same person may wear many hats, a lack of oversight can lead to honest mistakes or opportunities for misuse.

The Power of Simple Controls

Even basic controls can help prevent issues before they become costly:

• Segregation of Duties: Make sure the same person isn’t responsible for authorizing, recording, and reconciling a transaction.

• Approvals and Authorizations: Require documented approvals for expenses, payroll changes, or high-value purchases.

• Reconciliations: Regularly reconcile bank accounts, payroll reports, and financial statements to catch errors early.

Let’s look at a few practical examples tailored for small business operations.

Payroll Controls

Payroll is one of the most vulnerable areas for small businesses. Simple practices can prevent both fraud and costly mistakes:

• Require written approval for new hires, salary changes, and terminations.

• Restrict payroll access to authorized personnel only.

• Review payroll summaries for each pay period to confirm hours, pay rates, and totals.

• Set up direct deposit monitoring to catch ghost employees (fake employees created to divert funds).

  
  

Expense Approvals

Unchecked spending can snowball quickly. To stay ahead of it:

• Use expense policies to define limits for employee purchases or reimbursements.

• Require receipts and management approval before issuing reimbursements.

• Use software to automate approval workflows and track who approved what and when.

  
  

Revenue Recognition

Improper recording of revenue can lead to misstated financials and audit issues:

• Establish clear policies on when and how revenue is recorded.

• Reconcile invoices with bank deposits to ensure completeness.

• Separate the functions of billing, collections, and accounting whenever possible.

  
  

Don’t Overlook Technology-Based Controls

Most small businesses rely on software for accounting, payroll, and expense tracking. That means your internal controls should extend to your digital tools as well:

• Limit system access to authorized users and roles.

• Enable audit trails to track who made changes to financial records.

• Use two-factor authentication (2FA) to protect logins for accounting platforms.

• Back up financial data regularly in case of accidental loss or cyber incidents.

These application-level controls help prevent unauthorized access, reduce the chance of errors, and add another layer of protection to your financial reporting process.

Conclusion

Internal controls aren’t about creating red tape. Internal controls are about protecting your business and giving you confidence in your numbers. With just a few intentional steps, even small teams can significantly reduce the risk of error or fraud.

Start with the basics, build a culture of accountability, and revisit your controls periodically as your business grows.

2 Liquid Assets

One of our goals here at 2 Liquid Assets is to provide small businesses with referrals to obtain the various products and services they need to be successful.  We align ourselves with other small businesses that provide quality and value to our customers. Please patronize Louis Van Der Westhuizen, Principal at Impact Risk Advisors www.impactriskadvisor.com and let them know 2 Liquid Assets referred you!