INTERNAL CONTROLS.

• Author: Seaman, James
• Position: A BEGINNER'S GUIDE TO

Proper internal controls keep your organization and its employees safe from fraud and its repercussions. Often, the key to success is prevention. This article looks at the different types of internal controls and why they are important-and provides simple but effective tips to establish them.

We have all heard about the fraud triangle: rationalization, opportunity, and incentives/ pressures. But what we don't always do is to consider what that means in our organizations. In many fraud cases we read about, basic preventive controls were found to have been ignored, or were often completely missing from the organization. At the most basic level, these included access to banking information, cash, or other assets that an employee didn't need access to. Quite often, detective controls including traditional supervisory review activities are not being performed. But these controls can provide an additional level of assurance beyond front-end and often daily transactional controls.

Why controls are so important

Examples abound of what can happen when proper internal controls aren't implemented. In one recent case, a school district employee gained access to cash deposits and skimmed thousands of dollars from the district before the scheme was finally identified. At another municipality, the council was hesitant to spend American Rescue Plan Act [ARPA] funds because they were concerned about millions of dollars that might have gone missing. In other organizations, inappropriate credit card activity and checks written to ghost companies went undetected for months before coming to light.

In many of these situations, a simple supervisory review would catch these schemes. However, one key control for all organizations--particularly smaller offices, where segregation of duties can be a challenge--is the completion and review of bank reconciliations.

This is a fundamental step, but it obviously isn't being performed as well as it should be. Of further concern, many bank reconciliations are superficial in nature and aren't performed to the degree required to achieve effective cash control. It's been proven that timely completion of bank reconciliations can help mitigate instances of fraud or detect it more quickly.

Segregation of duties is a key internal control that should be implemented wherever possible. For example, once accounts payable cuts a check, someone other than accounts payable should mail it. Bank deposits should be made by someone other than...