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

Part Two:

The following is a continuation from last week’s Blog Post: How to Combat Fraud Before It Rears Its Ugly Head – Part One

Here are the top 3 key internal controls that MUST be set up by every organisation to prevent fraud before it rears its ugly head:

1. Segregation of Duties

 Segregation of duties involves the separation of the duties of those persons who handle the custody of assets, the authorization of transactions affecting those assets and the recording and/or reporting of related transactions, involving those assets.

In other words a single employee should not be in a position to both commit and then conceal fraudulent activities by being involved in all aspects of the transactions of those assets.

In fact, the Institute of Internal Auditors (IIA) suggests there needs to be an adequate division of responsibilities among those who perform accounting procedures or control activities (authorization/recording) and those who handle the assets (custody).

The key point is that the flow of internal control processes should be designed in such a way so that one individual’s roles and responsibilities serve, in part, as a check and balance of another individual’s work.

An efficient internal control system with adequate segregation of duties serves to reduce the risk of undetected errors and acts as a deterrent to misappropriate assets or conceal deliberate misstatements in the financial statements.

2. Bank, Vendor, Customer Reconciliations

Reconciliation of bank accounts and management review of periodic account reconciliations (bank reconciliations, petty cash, vendors, customers, etc.) and bank statements.

Bank reconciliations, for example, provide insight into the differences between an organization’s cash balance as shown in their books and the bank statement, as supplied by the bank. Reconciliations also verify the completeness and accuracy of the data recorded in the organization’s general ledger.

Vendor and bank reconciliations may be performed anywhere from a daily to monthly basis, depending on the size of the organization and the volume of transactions handled during the course of business.

3.Petty Cash Management

Safeguarding and reconciliation of petty cash funds on a periodic basis by authorized employees is a key internal control even though petty cash funds typically represent an insignificant amount of cash held by an organization.

Improprieties in the petty cash system may be an indication of broader issues regarding management’s approach to internal controls and the organization’s control environment.

You can read about the controls to strengthen the petty cash system via an article “Petty Cash, Petty Risk?” we wrote earlier this year.

Again, preventing and combatting fraud within your organization starts with YOU. Make the decision today to design the internal controls needed to strengthen your organisation’s systems or contact us for a free 15-minute consultation on how we can work together to achieve your objectives.