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Many retailers do not have good internal controls in place and place little importance on them.  They are concerned with the buying and selling of merchandise and do not place enough emphasis on making certain that the sales get recorded, the money gets in the bank, the invoices are paid only once and the inventory reports are correct.

Why should you be interested in establishing and maintaining sound internal controls?   Good internal controls  help ensure the accuracy, completeness and validity of information.  They help to prevent anyone from deliberately tampering with information and also help prevent employee dishonesty.  Internal controls do this by building checks and balances into your procedures and record keeping system.  

What happens when internal controls are lacking?  Following are several examples of actual incidents where we were called upon by retailers after they discovered occurrences of internal theft.

  • The store manager who was "transferring" merchandise from one store to another. In fact, he was diverting the merchandise for his own use.
  • The bookkeeper who "adjusted" her own charge account so she was getting her merchandise free.
  • The salesperson who processed cash refunds using fictitous names and pocketed the money.
  • The cashier who destroyed cash sales tickets and pocketed the cash.
  • The bookkeeper who used company checks to pay her personal bills.
  • The receiving clerk who helped himself to new merchandise that had been received.

The above examples resulted in losses to these retailers ranging from several thousand dollars to fifty thousand dollars.  In all these instances, good, sound internal controls were either lacking or not being enforced. 

The above examples emphasized internal theft; however, lack of sound, well-enforced internal controls can also result in other problems for the retailer.  For example, without them the following can occur:

  • Vendor invoices paid twice. This not only reduces cash but overstates book inventory and results in shrinkage.
  • Inaccurate management information resulting in wrong decisions being made.
  • If charge sales or payments are posted to customers' accounts incorrectly, you run the risk of losing valuable customers.

How difficult is it to institute a system of good internal controls in your store?  It does not require excessive amounts of extra work and time to put good them in place.  Many controls are very easily established with only minor changes to the existing procedures.   The hardest part is actually identifying all the areas where internal controls are lacking.  While the store owner is the person most familiar with the store's operations, many times it takes the review of a retail specialist to identify the areas where internal controls are needed.

If you are wondering if your internal controls are adequate, following is a sampling of several common control procedures and why they are important.

If handwritten sales slips are being used, they should be numbered and all numbers should be accounted for in the office.  This helps prevent employees from destroying cash sales slips and pocketing the money.   It also helps to prevent the inaccuracy of sales, inventory and accounts receivable records due to misplaced or lost sales slips.

All transfers of merchandise from one store to another should be documented using numbered, 4-ply transfer documents.  One copy of the transfer document is sent immediately to the office.  One copy is kept in the sending store, one copy is sent by mail to the other store.  The another copy is sent with the merchandise to the receiving store.   The receiving store uses the transfer document to ensure they received all the merchandise.  Once they have signed off, one copy of the receiving document is sent to the office where it is matched with the first copy.  This ensures that all transfers are accounted for and recorded properly.

Cash refunds should always be a two-person transaction, with the store manager being the second person.   Require the customer's signature, address and phone number on the cash refund slip to verify that they received the cash.  Someone in the office should follow up on customer returns with a phone call.

Call to the customer to make sure the customer was well treated in the store when they made their return.  This also serves to validate the fact that the return was in fact made.  Require that the customer's copy of the original sales slip be attached to the cash refund slip.  Enterprising shoplifters have been known to try to obtain a cash refund by returning stolen merchandise.  Also, if a customer wants a refund for merchandise paid for by check, a refund check should be mailed after sufficient time has elapsed to ensure that the customer's check will not be returned to you by the bank.

Checks should never be signed unless all the supporting documentation is there; then this documentation should be "canceled" in some manner so it cannot be used for another check.  This is also a good time to check for discounts that were not taken or for credit memos that were not deducted.

One way in which employees can accomplish theft in wholesale quantities is in the receiving area.  To prevent employees from putting boxes of merchandise in with the empty boxes from receiving so they can take it out for an accomplice to pick up later, keep the trash area separate from other areas in receiving so the store manager can easily check the trash at any time.  You could also require that the empty boxes be broken down so no merchandise can be hidden in them.  Clear plastic bags should be used to collect trash.

If you are using a computerized record keeping system, ensure that passwords are used wherever appropriate to prevent unauthorized persons from knowingly or inadvertently changing data.  A disgruntled employee could deliberately sabotage the company's records or change their balance in accounts receivable. 

As a retailer, you should be very concerned with having good internal controls in place to safeguard your assets (cash and merchandise) and to ensure that the company's records are correct.  Once internal controls are in place steps must be taken to ensure that all procedures are followed at all times.  

The have a manual called, "Internal Audit Manual" that can be helpful in determining your company's weak areas.   If you do not have the time or inclination to do this yourself, seek outside assistance.  It will be well worth the money spent.  

If you do not invest the time and money to set up good internal controls now, you will be paying for it later in the form of theft, by employees or others, and inaccurate, misleading management information.


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Allen, TX 75002


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