How to Combat Fraud Before It Rears Its Ugly Head – Part One

Small and medium-sized businesses are most susceptible to fraud due to the fact that they often don’t have effective internal controls.

Don’t get me wrong, large companies are still susceptible to fraud occurring however they tend to have the resources, financial, human and operational to combat fraud. This is not the case with smaller businesses. In fact trying to cover every possible contingency in your business could lead to top-heavy management and a large team which you have to pay for on a monthly basis. No business-owner wants this problem on his head!

Nevertheless, implementing effective internal controls within the organisation could remove the opportunity and motivation for fraud and theft. By having the systems in place to discourage errors and identify mistakes and irregularities within a quick period of time, you are able to discourage fraud in the first place and, if that fails, you can take corrective action to minimise losses.

As the Owner/Manager/Managing Director/CEO/President, here’s a wake-up call: all fraud starts with YOU!

Harsh but true.

It’s your duty to become proactive to minimize the inherent risks within your company. Inadequate procedures, procedures left unchecked, overly trusting management all lead to ineffective controls and opportunists taking advantage. According to a 2014 Report published by the Association of Certified Fraud Examiners (“ACFE”), it is estimated that the typical organization loses 5 percent of its revenue to fraud each year. Can your company afford this? I think not.

Let’s look at how effective controls can assist in the fight against fraud in your company. First of all…

What are internal controls?

Internal controls are methods or procedures adopted in a business to:

• safeguard the company’s assets;
• ensure that the financial information is accurate and can be relied upon by Management or other stakeholders, both internal and external;
• ensure compliance with all financial and operational requirements, laws and other governing statutes; and
• essentially assist in the achievement of the business’ objectives and overall vision.

How can you set up control procedures to prevent fraud?

Each internal control procedure should aim to accomplish at least one of these eight criteria, according to a CPA Australia report, and these questions should be answered in the affirmative:

• Completeness: are all records and transactions included in the financial reports of business?
• Accuracy: are the right amounts recorded and are they in the correct accounts?
• Authorisation: are the correct levels of authorisation in place within the organization with respect to approval, payments, data entry and computer access.
• Validity: are the invoices recorded for work performed or products received and has the business actually incurred the liability?
• Existence: Do the assets and liabilities actually exist in the organization?
• System errors: this one is tricky, but are system errors being rectified expeditiously?
• Segregation of duties: Are certain functions kept separate within the Company? For example, the person taking cash receipts does not also do the recording in the system or does not do the banking?
• Presentation and disclosure: Are timely preparation of financial reports in conformity with generally accepted accounting principles?

Part Two: “How to Combat Fraud Before It Rears Its Ugly Head” is coming next week!