A recent study by the Association for Financial Professionals found that 82% of businesses are impacted by fraud. Does this surprise you? Fraud is prevalent in every industry, regardless of business size, from the small coffee shop to the growing tech startup.
The good news is the right internal controls can help your business detect and prevent fraud, allowing you to minimize your financial and operating risks. Here are five ways you to improve your internal controls to position your business for success in mitigating fraud.
#1: Create Written Policies and Procedures
To properly improve your internal controls, you need to go back to the basics. What policies and procedures do you currently have surrounding fraud? If your business has been around for a while, you may not have revisited written policies for the increased use of technology.
Well-defined policies and procedures provide notice to your team of the business’s expectations and practices. This gives them something to fall back on when they are confused about responding to a suspicious email or giving an employee access to a restricted area of your accounting software.
Consistent application of policies reduces your risk of internal control failures. In addition, transparent procedures provide continuity, ensuring that if a team member leaves, your business won’t crumble. Be sure you provide employees with a new copy each time you tweak a policy or procedure.
#2: Implement Consistent Oversight
The fraud triangle identifies three conditions that lead to a greater likelihood of fraud: motive, opportunity, and rationalization. Poor oversight gives employees the opportunity to commit fraud. Only having written policies and procedures isn’t good enough. Employees need to be constantly reminded that there is consistent oversight of all business functions.
Oversight can take on many different forms, from having multiple employees review the bank reconciliation to frequently checking vendor lists for fictitious names. Stressing the importance of supporting documentation can make oversight easier. If employees include support for an additional payroll, it saves you time tracking down hours and the reason why there was another payroll run.
Members of management should also have a select list of reports that they track for unusual changes. This would not be a task for a lower-level employee and should be handled by upper management or the owners. Comparing actual results to projected results can uncover variances that may indicate asset misappropriation. The more oversight you have, the stronger your internal controls will be with employees understanding they are being constantly monitored.
#3: Have an Independent Audit
Independence is essential to effectively manage the internal controls of your business. Familiarity can reduce your internal control effectiveness. For example, if your team uses the same reconciliation reports, they will get used to finding certain numbers on the statement. This can lead to overlooking individual line items that may contain fraud.
A third party isn’t adept to your financial records, meaning they will verify each item through testing, inquiries, and other procedures. This can lead to the detection of weaknesses in your system, allowing your business to implement actionable change.
When it comes to the third party reviewing your records, they should have the proper qualifications. A run-of-the-mill bookkeeper might not know what to look for compared to a firm that specializes in fraud controls. This is why it’s important to vet your accounting professionals.
After all, an independent audit is only effective if the accountant understands what to look for and where to find weaknesses. The good news is that our team at Craib Accounting specializes in fraud. Our team is constantly staying informed on the latest legislation and is regularly going through continuing education to provide you with useful insights.
#4: Provide Staff with Proper Training
You could have the most detailed policies and procedures, but they won’t be very effective if your staff isn’t properly trained. When you onboard a new employee, they should be properly trained on their roles and how they should handle certain situations. Too often, employers throw new staff members into the field, leaving them to fend for themselves, and make costly mistakes.
Properly training your staff involves giving them a copy of your employee handbook, internal control guidelines, and assigning them another team member to turn to with any questions. Open communication is essential to maintain effective internal controls.
Also, consider implementing periodic reviews to see what you can do better as an employer. Oftentimes these reviews can lead to key insights that might have been overlooked. For example, if an individual casually mentions that they’ve seen another employee working after hours, it could help detect fraudulent activities.
#5: Segregate Accounting Duties
Another way to improve your internal controls is to segregate accounting duties. This goes back to the opportunity component of the fraud triangle. Employees that have access to multiple functions in your accounting system can easily conduct fraud. For example, if an employee completes the bank reconciliations and handles accounts payable, they may be able to create and pay a fictitious vendor without anyone noticing.
The authorization, execution, and posting of transactions should all be assigned to separate individuals. However, this isn’t feasible for a small business with only one or two employees. In these instances, you want to be sure you have the proper oversight with multiple employees reviewing the accounting data.
In addition, utilizing online software that you can specifically control alerts for can be beneficial. One example of this would be alerting you if a new vendor was set up to ensure it is not a ghost vendor. The controls you find most useful will vary based on your industry and transaction types.
Which one of these methods can you implement to improve your internal controls? Maximizing effectiveness in your internal controls takes constant adjustments, especially as technology continues to be intertwined in the day-to-day operations of your business.
This is why working with an expert might be beneficial. At Craib Accounting, we can find a customized solution that fits your business needs. From independent internal control audits to assistance in implementing internal controls, our qualified team can handle it all. Reach out today to set up a consultation to see how we can help improve your business’s internal controls.