Question

Discuss the meaning of “internal control” in the context of accounting. Then share five examples of internal control procedures designed to prevent fraud and accidental accounting errors.

Answer 1

Internal controls are the plans and/or programs implemented to safeguard your company's assets, ensure the integrity of its accounting records, and detect fraud and theft. Segregation of duties is an important component of internal control that can reduce the risk of fraud from occurring.

1.Know your employees

Fraud perpetrators often display behavioral traits that can indicate the intention to commit fraud. Observing and listening to employees can help you identify potential fraud risk. It is important for management to be involved with their employees and take time to get to know them.

2.Make Employees Aware/Set Up Reporting System

Awareness affects all employees. Everyone within the organization should be aware of the fraud risk policy including types of fraud and the consequences associated with them. Those who are planning to commit fraud will know that management is watching and will hopefully be deterred by this

Since many employees are hesitant to report incidents to their employers, consider setting up an anonymous reporting system. Employees can report fraudulent activity through a website keeping their identity safe or by using a tip hotline.

3.Monitor Vacation Balances

You might be impressed by the employees who haven’t missed a day of work in years. While these may sound like loyal employees, it could be a sign that these employees have something to hide and are worried that someone will detect their fraud if they were out of the office for some time. It is also a good idea to rotate employees to various jobs within a company. This may also reveal fraudulent activity as it allows a second employee to review the activities of the first.

4.Hire experts

Certified Fraud Examiners (CFE), Certified Public Accountants (CPA)and CPAs who are Certified in Financial Forensics (CFF) can help you in establishing antifraud policies and procedures. These professionalscan provide a wide range of services from complete internal control audits and forensic analysis to general and basic consultations.

5.Live the Corporate Culture

A positive work environment can prevent employee fraud and theft. There should be a clear organizational structure, written policies and procedures and fair employment practices. An open-door policy can also provide a great fraud prevention system as it gives employees open lines of communication with management. Business owners and senior management should lead by example and hold every employee accountable for their actions, regardless of position.