Fraud Tip of the Week: Weak Internal Controls Invite Fraud!

fraudOne frequent area of neglect in managing and running a business is the area of internal control.  This is a particularly significant problem as it relates to fraud, as any incident of fraud will involve either a lack of internal control or a failure of internal control.  There are many possible reasons for this neglect but I will focus here on two of particular relevance when thinking about fraud:

  • The owner(s) and management do not view internal control as an “ROI” activity and, therefore, do not commit time to this aspect of the business; and,
  • People are comfortable with the way things are done and, especially in small businesses, feel that everyone is trustworthy.

With regard to the first item, the high cost of fraud is well documented.  According to the Association of Certified Fraud Examiners, the average fraud lasts 18 months and costs a business $140,000.  This equates to roughly $8,000 per month of additional cost for the business when fraud is occurring.  Also, these figures only represent the loss directly attributable to the fraud.  The effect of such a breach of trust on the morale and internal culture of the company and the possible negative impact on the company’s reputation in the market also need to be considered.  It just makes sense that mitigating this exposure would provide a positive return to the business.

The second item above is a little more challenging for two reasons.  First, employees naturally want to keep their daily tasks as simple as possible.  Increasing procedures for purposes of stronger internal controls can easily be viewed as adding work without adding value.  Secondly, employees want to feel trusted.  “Tightening” controls and changing the way things have been done in the past might be viewed as a loss of trust.  How do you overcome these challenges?  Engage employees in the process.  Provide training to educate employees on the risk and cost of fraud, both in general and in your industry and how the company is responding to those risks.  Make sure employees understand how those additional procedures they are being asked to perform contribute to a stronger, healthier organization for all employees.  Also, maintain a proper cost/benefit perspective.  Your business doesn’t have to be Fort Knox to effectively reduce your risk relating to fraud.  Your employees will appreciate that as well.

Don’t neglect internal controls in your business.  You may be opening the door to fraud.

Brian Davidson

My specialization is in the areas of assurance services, fraud risk management, and forensic accounting. I am energized by bringing insight to customers regarding their business and assisting customers in identifying and addressing significant business risks. I am also passionate about the truth and being an advocate for accuracy and integrity in financial reporting. http://www.cdhcpa.com
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One Response to Fraud Tip of the Week: Weak Internal Controls Invite Fraud!

  1. Pingback: Weekly Risk News (January 17, 2014) | Risk Conscious

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