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Allen Liebnick
Allen Liebnick

Who Needs Math/Internal Controls?

Find out.

January 7, 2010
by Allen Liebnick, CPA, CFF

Many years ago, my son wrote an essay in elementary school on why math was important. He ended up with a tongue-in-cheek essay on why he didn’t need math. His being he would never have to tell time since he could always ask someone for the time; he would never have to worry about getting the right change after he bought something because people are honest and who would cheat a little kid? He didn’t need to know the school bus number he was taking home, he could just follow familiar people; and he didn’t need to count the number of stops on the school bus to know his stop since he knew his stop was where a dog was always sunning itself under a tree. It was a cute essay and got the point across why math really is important in our daily lives. But how many times as professionals have we seen companies that could be the poster child for “who needs internal controls?” With apologies to Charles Dickens, let me tell you the tale of two companies. It was the best of internal controls it was the worst of internal controls.

Not too long ago, I was working with a client whose business had grown considerably in the last few years. They are in the retail/mail-order business and, even with the economy the way it is, their line of items is unique enough to still be in demand. As is typical, the business began in the garage and evolved into retail stores and a warehouse. They never took inventory in the warehouse because the owner had a “pretty good eye” at determining what was in the warehouse; the owner had a “great memory” so he never bothered to pass along to the AP department discounts and special deals he negotiated; they left the back door to the warehouse (which was where the employees parked) open so their employees could take smoke breaks out there; and just as the “no one would cheat a kid” mentality, they had multiple trusted employees as signors on their checking account.

Compare this to another company with which I was involved recently. This company is a service company with 23 company trucks that their employees used on a daily basis — which in itself could be a nightmare to oversee. It updated its computer systems with current accounting software professionally to meet its needs. Its computers/scanners and hard drives are updated on a regular basis, and uses state-of-the art equipment for its service personnel to prepare invoices onsite at the customer’s location. The service personnel are able to accept credit-card payments and print out a hardcopy receipt to the customer, with all the parts used — all from a hand-held device, which passes the information back to the company’s main server. But the area I was most impressed with was the global positioning system (GPS) they installed on all of their service trucks. In the past, there was a great deal of reliance on the service personnel to inform them where they were, their estimated time to arrive at the next location, and, in some cases, assure them that they were actually where they said they were. In order to save fuel costs and time, most of the service personnel took the company trucks home with them — fully stocked with company parts. It was not unusual for the truck’s inventory to always come up short. Parts that were supposed to be on the trucks would often disappear. The owner knew that some of their more “entrepreneurial” service personnel would sometimes moonlight on weekends, in disregard of the company’s policy, using the company’s service truck and parts.

The GPS system has made a world of difference. The call center now monitors where the trucks are at all times. The company can determine if the truck is still at a customer’s location, if it is now headed to the next job or if it is stuck in traffic. This, of course, gives the call center/company the ability to keep the customers apprised of when the truck will arrive and, if there are any delays (traffic), to let them know in advance. In addition, if a truck is taken home by one of the servicemen, and is supposed to be parked for the night/weekend at the serviceman’s home, an alert is sent to the owner’s e-mail if the vehicle is moving. The results are: less pilferage of parts, less concerns about the unauthorized use of the trucks, monitoring of service personnel’s time, fuel savings by being able to know who is in proximity to the next customer, the ability to forewarn drivers about traffic tie-ups, and, of course, a speedy alert if a truck is stolen.

In comparing the two different companies’ approach to internal controls, we need to keep in mind that the first business carries a very inexpensive line. The cost-per-item is very small and the more expensive items are, in fact, inventoried at the stores. Does it matter to the owner if he has a certain amount of pilferage? At this point, he says “no” — he is more intent on growing his business and can’t be concerned with the potential “nickels and dimes” he may lose. In fact, he thought it rather absurd at the suggestion that the back door should be alarm-armed so that employees can’t go through it for a smoke break. Is he destined to doom because of his nonchalant attitude about watching his inventory, petty cash and checking account? It is really too early to tell, but certainly from a professional point of view, it would appear to be a rather naïve gamble that he is willing to take for the sake of growing the business. And, as we all know, those “nickels and dimes” add up to dollars rather quickly.

On the other hand, there’s the owner of the service company knows how tough the market is for service companies and the competition he faces. He also knew that there was a certain amount of pilferage and he was well aware of the liability he faced if someone was using his trucks in off-hours. His concerns motivated him to invest in the future to ensure that he does have the best possible internal and operating controls. Has it paid off for him? Absolutely! His operation runs smoother, his insurance has been lowered and he is more comfortable about the control he has over his business, AND, he has seen his vehicle costs drop, resulting in net profits increasing substantially. He is positioned to continue to grow and compete in a tough market.

Conclusion

So who needs internal controls? E-mail me your story of the worst internal controls you have seen. Perhaps we can use it in future articles.

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Allen M. Liebnick, CPA CFF, is president of Overpaid Payables Recovery, Inc. A former associate professor, Liebnick has been providing accounts payable, sales tax and telecommunications post audit recovery services for over 15 years. He serves clients in the U.S., Canada and Mexico. He is a member of the New York State Society of Certified Public Accountants as well as Texas Society of Certified Public Accountants.