Who Does What, and Why Do You Care? Internal Controls are a Big Deal

Last week we told you about ways to reduce your risk for check fraud, so this week we’ll look at internal fraud – ways to beef up your internal controls so that your trusted employees aren’t tempted to steal from your business.

Experts estimate that the amount of money a typical organization loses to fraud amounts to 5% of annual revenue. That’s a lot of money.

On average, a fraud lasts 18 months before being detected. That’s a lot of time . . . . that can result in losing a lot of money.

What can you do to reduce the risk of fraud in your business? One of the best ways is to segregate accounting duties between your staff members.  Here’s how even a small office can divide up the work:

  • Mail should be opened by an individual not responsible for accounting. This person can make a list of all cash receipts and prepare the bank deposit. The list of cash receipts can then be forwarded to the accounts receivable clerk for posting to customer accounts.
  • Bank statements and enclosures should be received and reviewed by an individual other than someone responsible for maintaining accounting records. Often the owner can perform this task.
  • Before signing checks, review the supporting documentation.
  • Signed checks should be mailed without returning them to the individual who prepared the checks and/or is responsible for maintaining accounts payable.
  • Invoices should be designated as “paid” when payment is made to prevent duplicate payments.
  • Perform due diligence on new vendors to ensure they are legitimate.
  • Individuals who set up new vendors should not have check writing or check approval authority.
  • Bank reconciliations should be performed by an individual with no cash receipts or disbursements duties.
  • Online bank account access should be limited to only necessary individuals. Transfers should only be allowed between authorized accounts and not to outside accounts or sources.
  • General ledger journal entries should be reviewed and approved by an individual other than the person who prepared the entry.

These are just suggestions, but the basic concept is this – think about all the tasks in your office that handle money and accounting records, and divide them among different  individuals so that no one person has the ability to perform all the functions necessary to conceal a fraud.