Classical Approaches to Structure

Classical writer or theorists including Lyndall Urwick, Henri Fayol and E.F.L Breach, focused on a single set of principles.
To the classical writers, order and clear definitions were the chief aims of organizations – lack of precision and lack of clarity in the structuring of organization were to be avoided.

Fayol described characteristics of a good organization structure. For him, a good organization structure is one that share the following features:

• Division of Work: To improve practice and familiarity and become specialized
• Authority: The right to give orders, linked worth responsibility
• Discipline : Respect in accord with the agreement between the firm and its employees.
• Unity of Command : Each subordinate answerable to only one superior.
• Unity of Direction: Only a single head and plan for a set of activities.
• Subordination to the General Interests:The general good prevails over individual or sectional interests.
• Remuneration: Should be fair to both the recipient and the firm.
• Centralization: Invertible in organization, but the degree should be appropriate.
• Scalar Chain: Gradual lines of authority should exist from the top to the bottom of the organization.
• Order: Worker and material should be in prescribed place.
• Equity: Combining clemency with justice
• Tenure of Personal: Adequate time for setting into jobs should be allowed.
• Initiative: Should be encouraged within the boundaries of authority and discipline.
• E spirit the Corps: Harmony and teamwork should be encouraged in the organization while grouping and division should be avoided.

Welcome at my new article on Tax. This is a small intro about Function of Taxation and Qualities of Good Tax.

Function of Taxation : Taxation has several function for a government:

• To raise revenues for Government. As weell as fpr local authorities and similar public bodies (Education Unions)
• To discourage certain activities regarded as undesireable. The impositions of development land tax in the united kingdom in the mod 70s (since abolished) was partially in response to growth in property speculation.
• To save doemstic producer.Govenment levies tarrifs on importers that make expensive imports in comparison to local produce. This protects the rights of a local businessman. However in current global scenario, this artifical support is not encourage and there is a wave of free trade that restricts government from installing such taxes.
• Equal distribution of wealth. Through taxes, governmet may persue their aims for the equal distribution of wealth wher they receive from the rich and spend for the welfare of poor.

Qualitites o f a Good Tax :There are few features of  a good tax

• Flexibility. It should be adjustable so that rates may be altered up or down
• Effiecincy: It should not harm initative, but eavasion should be difficult
• It should its purpose with out distorting economic behaviour

Direct tax have the quality of being progressive or propotional. Income tax is usually progressive , with the high rates of tax charges on higher bands of taxable income. Indirect Tax can be progressive, when the tax are placed on essentials commodities consumed by the poor people in great qualities.

Keep visiting my blog for latest and updated articles and reviews.

Jim

A typical cash payment system may appear as follows:

What are risk and fraud in Cash Payment System

Cash payment system could be exposed to the following typical types of frauds which every company would try to avoid:

1)      Cash embezzlement

Cash is the most vulnerable item due to high value, handy nature and common acceptance. For this reason, cash embezzlement by some dishonest employee is not uncommon and design companies design such system which minimizes such chances.

2)      Cooking the books

Cooking the books refers to misrepresentation of accounts which is done to conceal and cash embezzlement. This could include omitting a transaction from recording and keeping the money received in the pocket.

3)      Over-invoicing and over payment

An employee may collude with a supplier to over-charge the company. From this over-included value the employee than picks his share.

4)      Dummy supplier and fake invoices

Fake invoices could be presented for payment in the name of dummy suppliers. The company pays for what she has got nothing. Such incidents reflect acute weakness of integration between purchase system and cash payment system because if properly integrated, chances of such incidents could be eliminated.

Part #1 : INTERNAL CONTROLS IN DIFFERENT ACCOUNTING SYSTEMS

ACCOUNTING SYSTEMS

In each organization there may be different systems or functions of different natures serving different purposes. However, accounting system is one we come across in every organization whether small or large, manufacturing or service enterprise, domestic or multinational etc. some organizations prefer to use some sort of accounting software e.g. Peach Tree, Sage Line 50, ACC1 etc, while some, mostly small enterprises, may find manual records adequate.

An accounting system is an organization is actually a collection of smaller accounting systems each of which performs a different function for example order processing, sales systems, purchase systems, cash receipt and payment systems, payroll systems and stock control systems etc. these systems are elaborated in the following lines.

These formal purchase systems encompass not only purchases of raw material and supplies but also of acquiring fixed assets. However for high value capital expenditures, some additional procedures may be required to be followed to ensure security and control over transactions.

A typical purchase system may appear as follows:

PURCHASE SYSTEM :

Purchase system above shows the transaction cycle that is completed in every purchase transaction.

Purchase system is often subjected to more stringent internal controls as there are more chances of fraud and errors due to physical flow of goods and consequent cash payment. Any omission could cause loss to the company. For this reason, completeness and accuracy of purchase transactions remain a major goal of purchase system.

RISKS AND FRAUD IN PURCHASE SYSTEM

Purchase system could be exposed to the following typical types of risks and frauds which every company wants to minimize:

1)      Fake invoices

It is very common type of fraud in which dummy invoices are presented for payment. This type of fraud is more common where systems are not properly integrated. If systems are integrated properly, such discrepancy could easily highlight in reconciliation of purchase, sales and closing stock.

2)      Over invoicing

An employee may join conspiracy with supplier and include the supplier to over-invoice purchases. The culprit then takes his shares from such surplus.

3)      Kicks backs from supplier to approve purchase order

For large and regular purchases, companies require quotations from several suppliers and after comparing these quotations, select a supplier and places purchase order. Every supplier struggles to get the orders. Here comes our ‘black sheep’ who stand ready to abuse their authority. These authorized executives approve quotations of a specific supplier by receiving bribery for the approval. These hinder the company from obtaining the best business deal.

4)      Short deliveries

This is a common fraud committed by drivers and storeroom in charges. In huge quantity, it is very difficult to count number of units or weight up all boxes. So small shortcomings could yield handsome monthly amount for culprits.

Click here to checkout the Purchase  Internal Control System

INTERNAL CONTROLS IN PURCHASE SYSTEM:

 To minimize the chances of fraud and error, following controls are applied on a purchase system. We may apply SPAM SOAP here:

1.       Segregation  of duties

Duties should be segregated for ordering, receiving and recording of purchases so that one person is not in a position to handle all activities and commit fraud.

2.       Physical controls

There should be tight physical control on the movement of goods. Every movement should be recorded. Further we should ensure safety and security of our warehouses. There should be proper fire fighting arrangement in place.

3.       Authorization of purchase order

To restrict the incidents of frauds, someone should be given authority to approve purchase orders. Further, there should be a maximum amount one could authorize, over this limit, authority of someone more senior could be required.

4.       Management control

Management should draw specific procurement policy that should be followed all over the organization. Usually there is different policy for the purchase of raw material and fixed assets. Fixed assets usually require higher level authorization, extensive documentation and financing arrangement etc.

5.       Supervision

All stock movements should be supervised by the warehouse in charge. Supervisors should review all purchase orders not received to ensure the availability of inventory. Supervisor should investigate the matter with the supplier.

6.       Organization control

There should be proper purchasing system in place. This system should define all the steps that must be taken and documents and records should be maintained.

7.       Arithmetic accuracy

In purchase cycle, accountancy serves a control purpose by keep proper track record of each and every transaction e.g. in daybooks, purchase ledger and general ledger. So we should ensure that accounting records are free from any material misstatements.

8.      Personnel control                       

We should ensure the integrity of our people. This is especially important in purchasing system as there are chances of easy fraud and often purchase-managers are really ‘wealthy people’ having dinners in hotels and ‘gifts’ from prospective suppliers. We may use ‘employee rotation’ as a control to ensure that employees are rotated from time to time and don’t stay in a place for so long. This reduces chances of frauds as successor could find the traces of fraudulent activities of the predecessor. Find here :Internal Controls in Accounting

OTHER CONTROLS:

9.       Physical examination of goods and GRN

It is important that goods are physically examined and counted or weighted when received. These ensure that goods are of the same quality and quantity as ordered.

10.   Documentation

It is always important to document each step in purchase cycle. For this purpose, organizations keeps pre-formatted and serially numbered source documents e.g. purchase orders, GRN, and debit notes etc.

11.   Matching documents before payments

Purchase cycle becomes part of overall cash cycle and plays important role to keep record of goods for which payments are to be made. Before payment, it is very common that source documents like order form, GRN and invoices are matched to ensure that we are invoiced for goods we have ordered and ultimately received.

12.   Reconciling purchasing and sales with stock in hand

Purchase, sales and stock balances should be reconciled regularly. This could highlight any discrepancy and pilferage of stock. To find all about Internet Marketing Click Here

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1. timely, accurate accounting information (both management and financial  accounts)
2. safeguarding assets
3. preventing and detecting fraud
4. efficiently running the business
5. internal policies followed

Of these, the first three are the most important to the external auditor.

As, such, directors are responsible for putting in place an appropriate internal control system, and regularly assessing its performance. An effective control system is a central theme of good corporate governance practice.

An integrated system is more effective with respect to control over transactions because of the following reasons:

Integrated system gives up-to-date information each time. Balances may reflect position upto the latest transactions. This is not possible in stand-alone systems where purchases may appear in the purchase account but not in stock accounts or customer payment may appear in the cash book but not in the sales ledger at the same time etc,

Items are automatically reconciled if all modules are integrated, for example inventory balance would tally with total purchase and sales figures.

Any discrepancy is identified very early because system is integrated and any omission in one module affects overall reconciliation, for this reason, employees may not indulge in teaming and lading. Such early identification help in promptly reporting the matter to the management.

As integrated system requires input once, there is less chances of data input error. This also ensures data consistency in content to stand-alone modules.

Internal controls should be tight, or bit loose depending on the circumstances but whatever internal controls are, none virtually foolproof. All have limitations or loopholes or even there are no loopholes, ‘intelligent’ people would find some. Here are the few limitations of the good internal control: To find different internal controls >> Click here

Human Error

In most extensive controls even, there remain chances of human error as it is individual beings who have to follow and apply these controls. In ‘Air Crash investigation’ on National Geographic, a plan crashed only because the ‘washman’ stick a tap on the sensor while washing and forgot to replace it. This sensor was meant to tell pilots of the distance from ground. So billion dollar plan crashed with invaluable lives when that sensor was telling. “we are flying at 2000 miles above the ground.” This plan has over thousand computerized and manual controls.

Collusion

Segregation is a good common control but if employees collude, they could easily bypass that control.

Abuse of Authority

Authorization an effective control however such control become a source of fraud if the authorized person is prepared to abuse his authority. Abuse of authority is difficult to detect and prove.

Cost Benefit of Controls

We cannot install controls at each and every place. Controls of course cause cost to incur and we have to save it. So there left some loopholes due to this cost saving.

Unusual Events

Controls are always and always meant for routine and expected events. If 9/11 occurs, what to do? 9/11 is a big example, in organization even smaller instances may disrupt the whole system of controls.

Change in Business Environment

Controls may get outdated if business environment get changed. Manual controls would have little use in computerized information system.

So, these were few limitations of the good internal control. To find CHARACTERISTICS OF GOOD INTERNAL CONTROL << Click Here. Keep visiting.

What type of internal controls an organization has to important in the organization depends on number of factors like nature of business, volume of transactions, information systems in place(manual or computerized). But whatever controls it employs, these should have following features:

1)      Simplicity

Controls often make systems complicated. A good internal control procedure should preserve the simplicity of the activity as far as possible.

2)      No obstacle in business activities

Controls are directed to erect barriers against the unlikely incidences, but they erect such barriers against the main activity. For example, buy raw material is a simple activity. When we place several controls on purchasing systems, it becomes more bureaucratic that involve several steps of authorization and excessive documentation. Controls should thus serve the control purpose without sacrificing the smoothness of business operations.

3)      Documentation

Every activity should be captured on some document. But does document means excessive paper work? Yes it is unless you are using computerized accounting systems to capture transactions in electronic form.

4)      Audit trial

Good internal control systems should provide full audit trail of each and every transaction i.e. date and time of entry, operator who entered terminal from where it is input etc.

5)      Segregation and internal controls

Internal controls should create a network of internal check and duties should be allocated in a way to ensure that one person’s work is checked by the other person.

6)      Acknowledgement of work done

Every person should acknowledge the work done by him or her through the signatures. This helps to fix the responsibility and accountability. One is accountable for the acts of oneself in the organization.

7)      Cost beneficial

Internal controls shall be cost beneficial. For this reason, we may not implement exhaustive controls. For example, biometric identification is good means of access control, but is bit expensive too. So such controls should be applied to very nature of activities e.g. nuclear works, chemical labs, bank cahier room etc.

8)      Efficiency, effectiveness and economy

Internal controls systems should be efficient i.e. timely reporting and action, should be effective i.e. prevents and detects frauds and errors and economical i.e. cost beneficial.

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There are good numbers of internal controls that are applied in business organizations. We may use the acronym SPAM SOAP to memorize them.

Segregation of Duties

Segregation refers to separating duties and allocating to different employees so that no single employee is in a position to commit fraud. For example, duties for authorization of payment, actual payment and recording are allocated to three different individuals. If a single person is in a position to deal all the three activities, he may authorize any sum to be paid to anyone for anything whether for business purposes or for personal purpose, further he may record them in whatever head of account to conceal the actual transaction.

Physical Controls

Physical controls refer to safeguarding assets from any physical damage e.g. fire, flood, wear and tear, theft etc. physical controls are especially important for portable and high value items e.g. mobile phones, laptops, projectors, cash etc.

Authorization and Approval

Authorization is an important control in which management authorizes specific employees to carryout some task. For example, to place purchase order, we have to authorize every purchase order from purchase manager. This is done to ensure that right goods are ordered to the supplier at the right time at the right price.

Management Controls

Management controls business activities by proper planning. Through its plans, management can asses future resource requirements, likely problems and ways to deal such problems. If there are no such plans, boat would be sailing in the river without any direction. Can you guess where it would to than? Under the riverJ

Supervision

Supervision refers to close monitoring of activities. Supervisors and job in-charges are made responsible to closely monitor the team of workers and give them direction to act in the most efficient way.

Organizational Controls

Organizational controls refer to departmentalization, demarcation of roles and responsibilities, organization structure, chain of command and management reporting. Even internal organization structure, chain of command and management reporting. Even internal organization culture plays goods basis for internal controls. If we look at the banks, they always maintain a solid culture for controls to avoid any types of frauds in banks.

Arithmetic Accuracy

Arithmetic accuracy refers accuracy of accounting records. It ensure that records prepared are free from any misstatement and transactions are recorded in their substance.

Personnel Controls

Personnel is the word used to denote all employees working in an organization at whatever level. Personnel controls are thus controls over employees. These include controls from the time of recruitment to dismissal to ensure that we are recruiting capable and honest employees, retaining required caliber and dismissing redundant staff. In most of the organizations, management establishes a separate personnel department (human resource department) to enhance performance of the employees.

Several organizations use ‘employee rotation’ as a personnel control. Others may use ‘enforced vocation’ (with the label of recreation vocation) to ensure that employees are separated from their job for a week or two and may look into the matters in his or her absence.

OTHER CONTROLS

There are several controls other internal controls that organizations usually employ.

Documentation

Especially in accounts, we prepare different source documents to capture transaction where it occurred. For this purpose, we may use the transaction trail of a purchase transaction:

Transaction                                                             Document Raised

Placing purchase order                                       Purchase order form

Goods received                                                      GRN (invoice received from supplier)

Purchases returned                                              Debit note raised

Check to be drawn                                                Check requisition form

Payment made                                                       Receipt received

Reconciliation

Reconciliation means to tally figures in different set of accounts. Following reconciliations are usually prepared:

• Bank reconciliation
• Sales ledger reconciliation
• Purchase reconciliation
• Stock reconciliation

Internal Check

Internal check refers to allocating duties in a way that one employee’s work is checked by another. You may have found internal checks in banks when cashier receives cash and records the amount on cash received sheet that is countersigned by another person.

Internal audit

Internal audit refers to carrying detailed scrutiny of accounting records to detect and fraud or error. Internal audit is an important control recommended by the Codes of Corporate Governance.