Internal Controls Help Crack Fraud

We all heard the saying, 'Don't put all your eggs in one basket.' When it comes to assigning responsibility for everyday financial transactions, business owners should heed this advice and never give too much control to one employee.

Every business owner should have an internal control system firmly in place. Vital in preventing cases of fraud and embezzlement, an internal control system sets forth policies and procedures establishing guidelines for the recording, processing and reporting of financial data and the safeguarding of a company's assets. Proper internal controls and distribution of duties should be designed to make it as difficult as possible to commit fraud.

In fact, many of the frauds discovered in business are uncovered through internal controls. Notification by an employee 'whistle blower' and internal audit review are other common ways fraud is revealed.

Duties must be wisely distributed in order to safeguard the company's assets. The risk of fraud is substantially reduced by ensuring that no one person has too much control in any one financial area. Careful distribution of duties ensures a system of cross-checking for your company. When various people handle different aspects of regular transactions, this provides a deterrent to fraud while increasing the chance of spotting signs of any fraud that still may occur.

The cross-checking seeks to convey that if anyone tries to steal or commit any kind of fraud, it most likely will be discovered by someone else close to the process.

Discovering theft is not the only result of distributing duties properly among your staff. Having more than one person involved in a process or series of transactions greatly reduces the chance that a mistake will go unnoticed. You'll be able to catch these errors earlier, often before they cause problems.

Use the Internal Control Checklist (below) to perform a preliminary evaluation of your company's distribution of duties. These are just a sampling of the areas where problems might arise, but it will provide a starting point to investigating the issue.

Business owners need regularly to evaluate their distribution of duties. Your system should be examined annually or, at the very least, whenever key people within your company are replaced. The frequency of the evaluations makes it difficult for employees to commit or cover up theft. And if your employees know you are on a constant lookout for fraud, it makes them less likely to try anything. For those companies with very small staffs, ideal distribution of duties is not always practical or even possible. But even if you are unable to follow all of the suggestions recommended in this article, you should at least be aware of their significance and keep a watchful eye out for signs of fraud.

If you are concerned about your internal controls (or lack of them), please call us. We can help you evaluate your current procedures and, if necessary, reallocate these duties in order to protect your company.

Internal control checklist

Internal control checklist

	Does the person responsible for preparing cheques have cheque-signing authority or final authority to approve suppliers' invoices?
	Is the stock of continuous forms (invoices, cheques, receipts) maintained and accounted for by the same people who use them?
	Does the person who takes the deposits to the bank have any responsibility for preparing the paying-in records?
	Does the person responsible for reconciling the bank account also have cheque-signing authority?
	Does the person who prepares the monthly debtors statements also mail them?
	Does the person who opens the daily mail have any responsibility for debtors?
	Are pay cheques directly distributed to the employees by the wages clerk?
	Is the sales ledger clerk authorised to write off errors?
	Does the cheque preparer mail outgoing cheques?

If you answered 'yes' to one of these questions, you may be creating a situation conducive to fraud. If you answered 'yes' to more than a few, your company needs immediate procedural changes.