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Word to the Wise – Fine-Tune Internal Controls to Deter Fraud

Word to the Wise: Fine-Tune Internal Controls to Deter Fraud
Angela Abfall

January 13, 2020

One of the best things about closely held businesses is working with people you know and trust. Yet, close relationships are also a business risk because familiarity and kinship can create an opportunity for fraud. As an owner, you likely assume that your relatives would never cheat or steal from the family business. But the “fraud triangle”—pressure, rationalization, and opportunity —proves otherwise. If they are stressed, can justify their actions, and have the opportunity, even close family members might disappoint you. 

Update Your Procedures

This is where internal controls can save the day—and your bottom line. Internal controls are policies and procedures to control risk, protect resources, and ensure reliable financial operations and reporting. Weak internal controls are associated with increased risk of fraud.

Are your internal controls effective? Look at this list of a few common procedures and assess your company’s current efforts:

Separation of duties
Having more than one person required to complete a task makes it harder to commit fraud. For example, the person who opens the mail and receives checks or cash should not be the same person who records the funds in your accounting system. The person who orders goods should not be the same person who logs the received goods into the accounting system. The person who handles payroll data should not be the same person who verifies the payroll calculation.

Separating these jobs makes it difficult for one employee to divert funds into his or her own account, steal incoming goods, or create and pay fake employees. In small businesses, it can be hard to separate duties, but many companies ask employees to help ensure that different people are involved in these types of tasks. 

Access control 
Everyone does not need access to everything. Limiting access to different parts of your accounting system via passwords, lockouts, and logs lets you exclude unauthorized users. These types of controls also create an electronic audit trail to find discrepancies and see who’s been poking around—or worse—in the system.

Approval and authorization
Having two people authorize large payments or expenses is an easy way to deter fraud. You may choose to implement a system requiring a certain manager to approve payments of a certain type or amount. Or you may require multiple signatures on checks. 

Trial balance and reconciliation
Periodically running a general ledger trial balance is not only a good way to catch errors, it’s a great way to uncover fraud. If the sum of the debit entries doesn’t match the sum of the credit entries, something is wrong. Similarly, periodic reconciliations will let you know if your accounting system balances are in sync with bank, supplier, and credit balances. 

Identify Problems Fast 

Don’t let loose internal controls open the door to fraud. The sooner you implement or improve your internal controls, the faster you can take action to deter fraud and eliminate potential problems.

Ask your CPA about an internal controls study to assess your company’s fraud risk.

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