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The lost art of internal controls over journal entries will cost you thousands.

  • 07/18/2017
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By Marilou Vroman, CPA, CFE

Remember a time when journal entries were hand written on green ledger paper and were reviewed and approved by the controller prior to posting?  In a time when our DMS systems have enabled ease of journal adjustments through source journals we have found more opportunity for theft and income manipulation than ever before.

During our internal audits we often review adjusting journal entries very closely; we have found there is an inverse relationship between the cleanliness and “health” of a dealers financial records and the volume of journal entry adjustments that occur within the dealers books.  In a perfect world, there would be very few adjustments since every transaction would be recorded correctly up front.  Since we are not in a perfect world, it’s important to know who is adjusting the books, why those adjustments are being made and whether the adjustments have been properly approved by department management.

In your next monthly financial statement review, ask your controller if you can review the file of general journal entries and source journal adjustments.  Is there a file in the first place? Are the adjustments tracked in an organized way?  Do the adjustments have proper documented support?  Have the entries been approved by an authorized manager?  How many dollars have been written off over the course of one month and by who?

The items above should be easy to produce in an accounting department with strong controls over journal entries.  If there is any difficulty in producing an organized report of adjustments, explanation and support for these adjustments, this could be a sign of something much worse than inaccurate financial statements.

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