Internal Controls – What You Can Do

Don’t let employee theft happen to your business; internal controls can help reduce the risk of fraud, as explained by Valerie Lowry, CPA

In August 2020 an accountant admitted to stealing more than $7 million from a Louisiana shipping company. Theft by employees happens more frequently than you might think, to companies of all sizes. With the right internal controls, you can reduce the opportunity that fraudsters need to embezzle or steal from you. Do you have segregation of duties in place? As a business owner, do you open your own bank statements, for example? Even a small business can implement internal controls.

We’ve seen where the most loyal staff member has stolen – the opportunity was there, to complete Donald Cressey’s “Fraud Triangle.” The triangle shows that a trusted employee can violate that trust when there is pressure/motivation (such as need), along with rationalizing (attitude), when presented with opportunity or temptation at work. Here are some tips to reduce chances for fraud:

Be aware of changes in employee attitudes, behavior and lifestyles – attitudes that are hostile or defensive, changes in behavior that are not consistent with the employee’s normal demeanor, or lifestyles that are not reasonable based on the employee’s compensation.
Control the mail – Either the business owner or an employee with no responsibilities related to the handling or recording of cash, accounts receivable or revenues should pick up the mail. Limiting access to the company’s mail can help prevent unauthorized use of cash receipts.
Control the bank statements – The owner should open the bank statements and review the statements for missing checks, checks issued out of sequence, unknown payees, altered checks, unauthorized signers, and other unusual items.
Control accounts payable/cash disbursements – The owner should approve and monitor the vendor lists for any: unknown vendors, vendors with similar names to known vendors, vendors with PO boxes, vendors with no telephone numbers, or vendors whose address is the same as an employee’s address.
Limit authorized check signers – Only the business owner should be authorized to sign checks. If not possible, require two signatures for checks over a specified dollar amount. Avoid the use of signature stamps and checks that are printed with an electronic signature. The signer should review the supporting documentation for anything unusual before signing the check.

With the right internal controls, a business owner can reduce the opportunity for fraudsters. You might not be able to change human nature (the motivation and rationalization part of the Fraud Triangle), but you can eliminate opportunity. Internal controls can help reduce the risk of fraud, so contact Wegmann Dazet for help in designing your internal controls.