Good policies and procedures are important risk management components for companies both large and small. When evaluating the credibility of a prospective working capital borrower, understanding and evaluating the borrower’s internal control procedures applied to working capital assets and liabilities becomes especially important.
Preventive and detective financial internal controls are generally considered to be the primary purpose of procedures. However, a more expansive list of benefits* that good procedures facilitate include:
- Accuracy: Effective procedures provide detailed instructions for completing transactions operationally and administratively. It takes far more time to correct a transaction error than it does to complete the transaction correctly the first time. Therefore, error avoidance is an excellent reason to use procedures.
- Efficiency: It is much easier for the accounting staff to process business transactions and issue financial statements when there is a regimented approach to dealing with each type of transaction.
- Best Practices: When a business routinely examines its operations with the intent of creating procedures, the documentation process often brings to light questionable or inefficient practices. If brought to the attention of management, there may be an opportunity to use best practices to upgrade the company’s processes to a more efficient and effective level.
- Computer Systems: An accounting or enterprise-wide system typically works in conjunction with a set of procedures. If there is not a consistent set of procedures surrounding the system, employees may have difficulty entering information, and may not know the sequence of events needed to process transactions through the system.
- Controls: When it becomes evident there is a control weakness in a company, the system of procedures can be adjusted to correct the problem.
- Handoffs: Many processes may involve handing off work to a different department. Any handoff involves a considerable risk that work will not be transferred correctly, resulting in a transaction lapse that may ultimately impact a customer. A procedure states exactly how a handoff is to be completed, and so reduces the risk of a transaction lapse.
- Governance: In a business that has a top-down organizational structure, procedures are needed to ensure that business decisions made by management are carried out properly.
- Roll-Out Consistency: It is vastly easier to roll out a business concept when every location uses the same set of procedures.
- Training: Procedures can form the basis of employee training manuals that address the basic functions of a business.
Unfortunately, many small- and medium-sized businesses do not have written procedures governing the way accounting and management activities are to be carried out, are no longer appropriate, or are disregarded. In these situations the likelihood of mismanagement and fraudulent activity becomes significantly greater. When written procedures governing recording and management of working capital assets and liabilities are not available, it is imperative that the procedures in use be investigated and documented by the field examiner completing the survey examination.
When completing commercial finance examinations throughout the lending relationship, compliance testing is important to finding, documenting, and assigning responsibility for aberrations in the accounting records that could have a significant impact on collateral values and financial results.
*List of benefits from Bragg, Steven M: Accounting Procedures, ed. 2, The CPE Store, Inc., 2014.