Business Fraud Protection: The Importance of Internal Controls

By Kevin Mulligan and Brent Townsend

Setting up strong internal controls that protect a business from fraud can be challenging for small and medium size businesses. Generally, company executives lack time or resources to implement internal control safeguards to protect business assets. Other challenges businesses face are risk vs. cost, cost benefit, qualified personnel, and management override of internal controls.

Fraud Prevention

According to the Association of Certified Fraud Examiners 2019 Report to the Nations on Occupational Fraud and Abuse, businesses with less than 100 employees experienced the greatest percentage of fraud cases at 28% and suffered the largest median loss at approximately $200,000.

Having appropriate internal control procedures can help mitigate potential fraud and help your business run as efficiently as possible. Segregation of duties and cash management are two common internal controls necessary for a business to operate efficiently with the lowest opportunity for potential fraud.

Segregation of Duties

Properly segregating duties within a business takes advantage of natural checks and balances by removing opportunities for fraud. Having the same employee responsible for multiple related duties is suggestive of a weak internal control relating to segregation of duties. Transactions that require authorizing, processing, recording, and reviewing a transaction should be performed by separate employees. No matter the size of your business or number of employees, a well thought out separation of duties internal control can reduce mistakes and opportunities for fraud to occur.

Cash Management 

Internal controls should also be in place to protect your business from mismanagement of funds and fraudulent activity related to cash management. A single person recording deposits, receiving and opening bank statements, and reconciling bank accounts would suggest a weak cash management internal control. A strong cash management internal control would include reconciliations being performed by one person and reviewed by a separate person after an owner or manager reviews the bank statement. Proper management of funds in the bank is only a portion of cash management. Proper controls and procedures should also be in place for management to review the underlying accounts receivable and accounts payable reports to track potential negative trends and making sure cash is being received by customers and paid to vendors in a timely manner.  Manipulation of these underlying reports by employees is also a key component of trying to cover up not only fraudulent activity but also general mismanagement of funds.

How DHJJ Can Help

These are just a few of the many internal control issues that business come across. Unfortunately, many businesses don’t realize their weak systems until the fraud has already taken place. Making sure that you have appropriate controls and procedures in place can help to provide the peace of mind that is necessary for the small business to continue to do what it does best for years to come.

The Innovative Services Group at DHJJ has a team of trusted, experienced professionals that handle all areas of internal controls, business consulting, and tax and financial reporting compliance. Working with business owners and controllers, they can review internal controls that are in place and recommend additional controls to increase efficiencies, effectiveness, and to mitigate potential frauds from occurring in your business.

 

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