By Jolene Fraser
When it comes to the prevention, quick detection or mitigation of internal and external fraud, it’s important that business owners turn their attention to the factors they can control and closely monitor those that they cannot.
Let’s examine how business leaders can focus on internal controls and create a culture of security around them to protect against business fraud.
Understand the Difference Between Preventative and Detective Controls
Internal controls are guidelines, processes or rules implemented by organizations to reduce risk, stay compliant and protect the business. To properly understand the benefit of internal controls, it’s important to first understand that internal controls can be both preventative and detective measures against fraud.
Preventative controls are designed and implemented with the goal of mitigating fraud before it arises; detective controls are implemented to detect and provide notification of fraud that may have already happened or is currently occurring within a business system.
Examples of Internal Controls to Prevent and Detect Fraud
While internal controls are by no means a one-size-fits-all solution for businesses, here are just a few general frameworks to proactively mitigate and detect fraud:
Segregation of Duties – Separating the responsibilities between specific high-risk tasks between multiple individuals, therefore reducing the opportunity for any one person to commit fraud.
Approval Policies – Providing specific employees or upper management with the authorization to approve certain actions, transactions or processes.
Performance of Reconciliations – Comparing two or more sets of financial information for accuracy and agreement, or tracing transactions back to documentation, ensuring everything matches and there are no disparities.
Management Oversight and Monitoring – Defined oversight and monitoring processes for finances, budgets, transactional limitations and approvals to maintain accountability and adherence to policies.
No matter the size of your organization or the industry in which you operate, fraudulent activities, whether they stem from internal or external sources, your first and best line of defense is a strong system of internal controls.
Jolene Fraser is a Managing Director in the Forensic, Litigation and Valuation Services Group at EisnerAmper with 25 years of public accounting and consulting services experience. She works with counsel and their clients on complex accounting, auditing and financial issues throughout the litigation process across a wide variety of industries.
