Preventing Fraud Within Your Business

Preventing Fraud Within Your Business

Have you ever turned on the news and seen the headline “XYZ Company involved in massive fraud scandal” and experienced instant gratification that it isn’t your company being mentioned? Chances are good that the management team at “XYZ Company” had that same thought at another point in time when viewing a similar headline. Your management team can begin preventing fraud by understanding the fraud risk factors and implementing a system of robust internal controls.

Before a company can prevent fraud, it must understand the fraud risk factors. There are three conditions that are generally present when fraud occurs which make up the “fraud triangle”; Incentives, Opportunity, and Rationalization. The incentive is often associated with pressures or a reason to commit fraud. Employees may have incentives or pressures ranging from a large amount of personal debt, a sick family member with pressing medical bills or even a good friend that needs financial help. While these incentives may be hard for management to identify, they are harmless without opportunity; the second point on the fraud triangle. Opportunity is caused by a lack of effective internal controls within the company. Let’s say for example an employee has access to the checkbook and the ability to write checks without any secondary authorization, and this same employee has a sick family member and the medical bills are piling up. This employee may rationalize their behavior and say “my family member needs a few thousand dollars more than the company does, I’ll pay it back eventually and they won’t even miss it”. In this case, all three elements of fraud are present and the entity has a potential disaster on its hands.

The best way for a company to prevent fraud is to combat the “opportunity” element of the fraud triangle by implementing a system of robust internal controls.

Here are a few ways your company can strengthen internal controls:

1) Segregation of Duties

This is a basic internal control activity but can sometimes be challenging to implement. At the core of this control is the idea that no single employee should have control over more than one step of a transaction. Ensuring that this control is in place will make fraud more difficult to facilitate because more than one employee would have to be involved in the fraud scheme.

2) Physical Controls

This element of internal control ensures that physical access to assets such as inventory and cash is limited and guarded by security. To ensure the physical controls are appropriate there should be physical segregation of assets, authorized access to assets and records, and periodic reconciliation of the actual assets to accounting records.

3) Implement Written Policies and Procedures

The best way for an entity to verbalize expectations is to create its own written policies and procedures for the business process and the financial process. By putting these policies and procedures in writing and sharing them with all employees, a company ensures that everyone is aware of the proper way to complete a given task. These written documents can also serve as a training tool for new employees while they are learning their responsibilities as a new hire.

4) Monitoring

All of the aforementioned controls are a great way to reduce the chances of fraud occurring within a company, but implementing them and not revisiting them would render the entire exercise futile. By monitoring the internal controls, management is assessing the overall performance of each control. As systems change and employee roles change, internal control should change as well to ensure that it is continuing to perform effectively.

If your management team maximizes the effort put into designing and implementing internal controls and ensures that they are constantly assessing and evolving these controls, they have greatly increased the chances of preventing and detecting fraud and reduced the chances of being the next breaking news story.

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2022-10-10T14:03:18+00:00March 1st, 2022|Business, Financial Reporting, Other|

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