looking forward
November 8, 2013

3 Key Internal Controls to Mitigate Credit Card Risk

Christopher W. Shermer, Senior Accountant, Audit & Accounting

3 key internal controls to mitigate credit card riskCredit cards can be an invaluable financing tool for your business. They facilitate the purchase of goods and are indispensable for travel and entertainment expenses. However, the nature of credit cards creates unique risks that require careful consideration. Without proper internal controls and processes, credit cards can be used to misappropriate assets without detection for an extended period of time.

Here are three key internal controls for credit card use that you may want to consider putting in place in your business:

  1. A formal credit card policy. Consider creating a formal credit card policy that dictates which employees are authorized to use your company’s credit cards. The policy should clearly state the types of purchases that are allowable and the procedures for documenting the business purpose for each respective expense. It is important to enforce this policy for all card users, regardless of their level in the company’s hierarchy. Allowing top-level employees to bypass these policies can create an atmosphere in which others may do the same. It is also important to spell out the consequences for inappropriate credit card usage.
  2. Substantiation. Original receipts must be submitted for all credit card charges, as these receipts substantiate the purchases made with the card. The business purpose should be documented on the receipt to ensure that the charge was a legitimate business expense. The receipt also ensures proper general ledger coding of the expense. Expense reports and credit card receipts should be submitted for processing in a timely manner to allow proper review and reconciliation of expensed items.
  3. Regular statement reviews. A supervisor who is knowledgeable about the nuances of the business (ideally not a credit card holder) should open and review all credit card statements and supporting receipts to verify the propriety of the charges. The reviewer should be thorough, detailed, and have a skeptical mindset. Reviewers should also be comfortable and willing to enforce the internal control policy regarding receipts and coding of expenditures. Employees should not be allowed to verify the authenticity of their own charges.

A few additional controls to consider:

  • Set monthly and overall credit limits for all employees who are issued credit cards.
  • Perform initial and annual credit checks on all employees who are issued a credit card.
  • Disallow cash advances.
  • Set up monitoring rights with the credit card issuer to allow online review and notification of any unusual activity.
  • Compare expense amounts to prior periods and to budgeted amounts.

Charging personal items to the business constitutes credit card abuse. With the proper internal controls you can ensure credit card payments and reimbursements are made for legitimate business purposes and reduce the risk of fraudulent activity.

Christopher W. Shermer can be reached at cshermer@kmco.com or 215.441.4600.

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