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Internal control is an essential aspect of hotel accounting that ensures the accuracy and reliability of financial information. It helps to prevent fraud, errors, and misstatements by providing guidelines for procedures and policies. Effective internal control is crucial for any hotel to minimize risks and safeguard their assets. In this blog, we will discuss the characteristics of internal control in hotel accounting.
What is Internal Control?
Internal control refers to the policies and procedures that management implements to ensure that the hotel’s assets are safeguarded, transactions are recorded accurately, and financial reports are reliable. It involves monitoring and controlling the activities of the hotel’s staff to prevent errors, fraud, and misstatements in the financial statements.
Characteristics of Internal Control
- Segregation of Duties: This characteristic ensures that no single individual has control over all aspects of a transaction. It involves separating the authorization, custody, and recording of transactions to minimize the risk of errors and fraud.
- Authorization: This characteristic involves setting up policies and procedures that dictate who can approve transactions and how they should be approved. It helps to prevent unauthorized transactions and ensures that only valid transactions are processed.
- Record Keeping: Effective internal control requires accurate and timely record-keeping. This characteristic ensures that all transactions are recorded and that the financial statements are up-to-date and accurate.
- Physical Control: This characteristic involves securing the hotel’s assets, including cash, inventory, and equipment. It helps to prevent theft, misuse, and loss of assets.
- Independent Verification: Independent verification involves regularly checking and reconciling transactions and financial statements by an independent third party. This characteristic ensures that the financial statements are accurate and reliable.
- Risk Assessment: This characteristic involves identifying and assessing the risks that the hotel faces, including fraud, errors, and misstatements. It helps to determine the areas that require additional internal control measures.
- Monitoring: Monitoring involves regularly reviewing and testing the internal control measures to ensure that they are working effectively. This characteristic helps to identify weaknesses and areas that require improvement.
Major Types of Frauds
The internal control system is not only designed to prevent and detect fraud, but also to prevent and detect an error which is usually more common than fraud. Though it is very difficult to list down all kinds of fraud, in fact, every moment somewhere in the world, a new type of fraud takes place. Some of the common frauds are:
- Failure to make K.O.T.
- Failure to make Check.
- Failure to record sales in Sales Summary Sheet.
- Under recording to sale
- Picking up of food without proper check
- Collecting payment from guest without check
- Charging incorrect room rent
- Selling room without registration
- Payment of bill twice
- Receiving a bill without goods
- Receiving bills twice for one supply
- Receiving goods and bill without any purchase order
- Allowance or discount allowed without proper authorization
- Ghost payrolls
- Full payment made for substandard goods received
- Stealing hotels inventory and assets
Cash Control
A hotel may make a couple of lakhs of Rupees cash sale in a day. A cashier may be tempted to run away with the cash. To have an effective control of cash the hotel’s management usually do not appoint a cashier unless and until they are very sure about his credentials and they take a minimum of two references. Usually, cashiers are rotated very regularly from one outlet to the other and head cashier keeps a watch on them. All the cash collected by the cashier is deposited to the front office cashier along with sales summary sheet.
The imprest amount given to cashier is checked quite regularly, head cashier accountant/control department. The cashiers are not allowed to keep imprest money with them but is also deposited/kept at the hotel or handed over to the cashier of next shift. All the chequebooks are numbered and in case of any cuttings, the checks must be countersigned by the manager. The front office cashier is required to prepare a cash book. All the cash received must be banked. Except for front office cashier, who may be required to make petty cash payments on behalf of resident guests against visitor paid out, no other cashier is authorised to pay from the cash sales.
Cash Receipt & Payment/Disbursement
It is very important to control the cash receipts and cash payments/disbursements. No doubt in hotel industry it is becoming more and more common to settle the bills through vouchers/credit facilities extended to regular customers and through credit or debit cards but still a good number of guests settle their bills in cash. Moreover, the cash is received throughout the day and night and at various cash counters spread in different parts of the hotel.
Cash Receipt
Cash receipts must be controlled from the point of sale till is banked. The following steps are followed for its control
- Checks must be prepared for each cash receipt and a proper receipt must be handed over to the guest.
- The checks must be numbered and tearing, cutting or cancelling of the check must be signed by an authorised manager.
- All checks must be entered on the Sales Summary Sheet.
- The total cash received must be deposited in the bank immediately after the shift is over or instantly when there is cash more than the recommended cash in the cash chest. The cash should be deposited by each cashier himself or it should be deposited by the Front Office Cashier. But the Front Office Cashier must issue a receipt to each cashier on receiving the cash from them. The cash so received by Front Office Cashier must be shown in the Cash Book.
- Each cashier should be given a float/imprest for paying the balance to guests or for en-cashing foreign currencies (Only Front Office Cashier is authorised to accept foreign currency from guests). The float so handed over to the cashiers must be checked both at the end of the shift and during the shift (surprise check). The cashier should not be allowed to keep the float with them after the shift is over and the float should be deposited with the Front Office Cashier or should be handed over to the next shift’s cashier (in case of room service or coffee shop)
- The allowances/discounts/complementary should be only extended and signed by the authorised personnel.
- The unused checks must be kept under lock and key and the serial numbered checks are issued to the cashiers against their signatures.
Cash Payment/Disbursement
This includes control over purchases, expenses and salary payments. As far as possible the cash payments should not be encouraged. All payments must be made by cheques. As far as possible the hotel must avoid making cash payments, however, petty payments may be made, in cash by a petty cashier. The cheque must be kept under lock and key and cheque payments must be made after verifying bills, supply order, purchase order, invoice, store keeper’s report, and etc. Salary should be disbursed by making direct payments to the employees’ account opened in the hotel’s bank. Before making the salary payments the attendance from the department and time office must be taken into account. For larger amount cheques, if possible, two authorised persons must sign the cheque. The cash book must be kept ready up to the moment and must be signed daily by an authorised person. The bank reconciliation statement must be prepared on a weekly or fortnightly basis.