How to Implement Effective Financial Controls at Your Company

How to Implement Financial Controls

No company wants to be described as “a complete failure of corporate controls” — but that’s exactly how the new CEO of FTX assessed the now-defunct cryptocurrency platform. 

John Ray III took over from Sam Bankman-Fried as CEO after FTX filed for bankruptcy in November 2022, and despite having been called in by Enron in 2001, Ray said, “Never in my career have I seen such a complete failure of corporate controls and such a complete absence of trustworthy financial information as occurred here.”

Amongst Ray’s complaints were compromised systems integrity, faulty regulatory oversight and  concentrated control in the hands of a small group of “inexperienced, unsophisticated and potentially compromised individuals.”

Although this is an extreme case, many companies are still struggling with financial control issues and knowing exactly where cash is being spent. So, establishing effective checks and balances and implementing effective financial controls is essential to maintaining order and knowing exactly what is happening with your business’s money.

What are financial controls?

Financial controls are processes and procedures put in place by a business to prevent, detect and manage accounting errors. Depending on the company, these controls may be manual, automated or a combination of both.

Financial controls are important for any sized company, as they can prevent fraudulent activity, protect assets and ensure that all financial reporting is accurate. They also ensure compliance with all regional regulations. As such, the processes implemented can range across all departments from accounting to HR to IT.

Because financial controls are so wide-reaching, the most effective ones will vary from company to company. Below, see some of the most commonly enacted best practices for implementing financial controls.

Financial Control Best Practices (That FTX Should Have Followed)

Accounting 101

There was no in-house accounting department at FTX, which is problematic for an enterprise-scale business. Since the bankruptcy filing, a multibillion-dollar hole has been uncovered in the balance sheets. Ray claims he has yet to determine the company’s cash and crypto balances due to the lack of organization and even software used to conceal the misappropriation of customer funds.

This just goes to show how important accounting fundamentals are as a financial control. Discrepancies in the general ledger can be early alerts to fraudulent activity, and accounts should be reconciled frequently (daily or monthly) to ensure that all records match.

Appropriate Accounting Software

In a clip of his testimony that has since gone viral, Ray informed the U.S. Congress that FTX was using QuickBooks as their accounting software. In his words, “Nothing against QuickBooks — very nice tool — just not for a multi-billion-dollar company.”

QuickBooks is a great tool for SMBs, but it probably isn’t the right choice for a multi-billion business that needs more robust systems designed to handle a large volume of transactions.

Segregated Duties

Different people should be responsible for different parts of a transaction. The same person should not be initiating, recording, approving and reconciling a transaction. Splitting duties between multiple team members ensures that every transaction has multiple eyes on it and no one goes without checks or balances.

Accurate Reporting

If the general ledger is incorrect, the balance sheet, cash flow statement and income statement will also be off. So, with any of these numbers skewed by poor accounting, all reports generated would be inaccurate.

In the case of FTX, untrustworthy numbers mean valuations for the company were likely way off, costing investors billions of dollars. All of this could have been avoided with better kept accounts and more accurate reporting.

Tracking Expenses

Another viral-for-all-the-wrong-reasons revelation from Ray’s findings were that disbursements were not only allocated via a digital chat platform, but approved with emojis. “The Debtors did not have the type of disbursement controls that I believe are appropriate for a business enterprise,” Ray said.

Furthermore, there were outlandish expenses and perks paid for by FTX — including deeds to houses in the Bahamas for employees and advisors. Loans were not recorded, and deeds were made in employees’ names.

All of this points to a need for some seriously overhauled expense management. Records of every company expense and reimbursement should be recorded, tracked and supported with receipts.

How Mesh Helps Implement Financial Controls

Mesh allows companies to gain full visibility and control over their corporate spend. Physical and virtual cards with pre-approved budgets ensure that every transaction falls within company policy, while giving budget owners the ability to easily manage approvals, set spend limits, and track card activity in real-time.

Seamless integrations sync transaction data directly with your ERP, reducing manual work for finance teams and increasing accuracy of records.

To learn more about how Mesh can help your business control corporate spend, schedule a demo.

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