Blog

In the wake of the pandemic, many small business owners have become increasingly concerned about fraud. According to SAP Concur, a staggering 85% of businesses surveyed expect the risk of fraud to continue even after the pandemic. Making matters worse, many fraudulent acts originate from within businesses themselves. Below you will find some essential internal controls that you can implement to safeguard your business and mitigate the risk of financial mismanagement and fraud.

1. Segregation of duties

A critical first step in preventing fraud is ensuring that no one individual has control over all aspects of any significant transaction. For example, the person who approves expenses should not be the same one who processes payments. By distributing tasks among multiple employees, the chances of fraudulent activity going unchecked are significantly reduced. This internal control is particularly important for small businesses, where roles may overlap, making it crucial to ensure that checks and balances are in place.

2. Regular financial reconciliation

Routine reconciliation of financial statements, such as bank statements, helps in identifying discrepancies or unusual transactions early. Create a consistent schedule—monthly or quarterly—to compare transactions in your accounting software against bank records. If you have an accountant, engage them in this process to ensure the highest level of scrutiny. Keeping a close eye on these financial statements not only helps to identify potential fraud but also aids in maintaining accurate financial records.

3. Comprehensive access controls

Restricting employee access to financial systems and sensitive data is vital for reducing fraud risk. Employees should only have access to the information and functionalities necessary for their roles. For example, HR staff should not have access to accounts payable functions. Implement multi-factor authentication (MFA) and regular password updates to bolster security further. This internal control limits the potential for opportunistic fraud and shows employees that the organisation takes security seriously.

4. Employee training and awareness

Educating employees about fraud risks and the importance of internal controls is essential. Conduct regular training sessions that cover how to identify and report suspicious activities. Encourage a culture of transparency and communication, so employees feel comfortable voicing concerns. Consider using real-world examples pertinent to your industry to make training more relatable. This approach not only empowers employees to act as your first line of defence but also reinforces the importance of safeguarding the organisation’s assets.

5. Whistleblower policy

Establishing a robust whistleblower policy encourages employees to report unethical behaviour or fraudulent activities without fear of retaliation. Ensure that this policy is well-publicised and accessible to all staff. Consider offering anonymous reporting channels, such as hotlines or secure email addresses. A strong whistleblower policy not only enables early detection of fraud but also fosters a culture of accountability and ethical behaviour within the organisation.

6. Comprehensive internal audits

Conducting regular internal audits, either by internal staff or external auditors, serves as an additional layer of scrutiny. These audits can help identify weaknesses in your internal control systems and recommend improvements. Make sure to act on the recommendations provided in audit reports to continuously enhance your fraud prevention strategies. Regular audits not only help in identifying vulnerabilities but also demonstrate to stakeholders that the organisation is committed to maintaining financial integrity.

7. Automated financial monitoring systems

Consider investing in automated financial monitoring systems that can provide real-time insights into transactions and identify anomalies that may indicate fraudulent activity. These systems often use machine learning algorithms to adapt to normal transaction patterns and alert you when something seems off. For example, if an employee typically submits monthly travel expenses of around $500 suddenly claims $5,000, the system can flag this anomaly for further investigation. Automated systems not only enhance fraud detection capabilities but also reduce the manual workload on finance teams.

Looking ahead

Implementing these internal controls will help protect your business against fraud and financial mismanagement. They serve as a solid foundation to build upon as your business grows and its specific needs evolve. Remember, the key to effective fraud prevention is not just having these controls in place but also regularly reviewing and updating them to adapt to new risks and challenges.

Ready to take the first step in strengthening your business’s financial integrity? Start by assessing your current internal controls and identifying areas for improvement. 

Give us a call – we’re here to help.