Internal controls can help organizations reduce the risk of fraud. It can be designed to prevent fraud from happening or to detect fraud after its occurred. While prevention is most ideal, the costs could outweigh the benefits for smaller organizations. Here are a few basic tips to help improve internal controls involving cash.
It’s probably no surprise that transactions involving cash and company bank accounts are the most vulnerable to fraud schemes. Therefore, it’s important to segregate duties as a form of internal control. This means that the following tasks should be performed by different individuals: authorization, recording and custody of assets.
The employee with check-signing ability should not be the same person that is recording the transactions and reconciling the bank statement. One individual shouldn’t be given the opportunity to write themselves a check, record it as a business expense and reconcile the account without anyone knowing the check was issued.
If it’s not possible to have different individuals involved in the process all the time, surprise checks could be the solution. For example, a manager or board member could randomly select a month to reconcile the bank account. Knowing someone could be checking in at any point can be enough of a deterrent for committing fraud (it works like an audit). Audits only catch about 4% of frauds but it deters people from committing it in the first place.
Custody of Assets
To enhance the reconciliation process, someone should have access to canceled check images. Unfortunately, most banks charge to include the images as part of the bank statement; however, they are usually available as an image through online banking. It’s important for the person reconciling the account to see who the checks are being made out to in order to identify any discrepancies. Some discrepancies can be two payroll checks to the same individual, a payroll check to an unknown employee or a check to an unknown vendor (just to name a few).
Although the act would have already been committed, the reconciliation process is important to detect fraudulent activity before it becomes a more significant loss. Unfortunately, some see bank reconciliations as too tedious or just another task on the to do list. Take time to educate those performing the task and make them aware of the importance and opportunity to detect fraud.
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