As the saying goes, an ounce of prevention is worth a pound of cure. When it comes to accounting, the most effective accounting departments have control procedures in place that aim to do both. There are two types of controls:
- Preventive controls are designed to block errors from occurring to keep financial data clean before it flows into financial reporting that goes to stakeholders.
- Detective controls identify errors or irregularities for investigation and correction after they are recorded. It’s important that the curative detective controls be performed regularly so that accounting errors are caught quickly.
Following are examples of preventive and detective controls that serve to minimize accounting errors;
Preventive Controls
1.) Use accounting software that includes error-reducing features, such as the ability to block lopsided transactions that would impact the trial balance. Choose a product with the highest level of automation and systems integration; this will minimize the need for excessive manual intervention, which is how many data entry errors are introduced.
2.) Invest in staff by training them properly, providing adequate resources and ensuring manageable workloads. Overstretched accounting departments are more likely to generate accounting errors.
3.) Segregate duties and provide adequate review to help minimize errors. These controls go hand-in-hand. By having a separate set of eyes review another person’s work product, errors can often be flagged at the front end of the accounting process. Since this can be challenging for companies with a small staff or where the owner does it all, consider using an outside accountant to review accounts periodically.
4.) Stay organized with proper record-keeping to reduce the likelihood of overlooking accounting transactions that produce errors of omission. Properly organized records are also required in the event of a tax audit.
Detective Controls
5.) Perform timely account reconciliations to compare accounting balances with external sources, such as bank statements, loan statements and credit card statements. Reconciliations can also apply to comparisons of subsidiary journals (that is, special chronological records of frequently occurring transactions, such as an accounts receivable subsidiary journal) to the general ledger, although this step can usually be eliminated by using integrated accounting software.
6.) Compare actual balances to budgeted balances to highlight variances. By analyzing variances that seem unreasonable, accounting errors can be discovered. For example, duplicated entries might create larger-than-expected balances, while omitted transactions may result in smaller account balances than might make sense. A similar procedure can be performed using actual balances from the current year versus the prior year or with regard to key performance indicators. Source