Canada: Fraud Prevention: Five Steps To Improve Internal Controls

Robert Jones has been working for you for over 15 years. More than a trusted employee, you consider Rob a friend. His dedication is unparalleled. Even as he navigated his way through a very difficult divorce a couple of years ago, he didn't take more than a couple of days' vacation.

You think that if Rob wasn't around, the accounting department would collapse. He does everything- from assessing and awarding some of the subcontractor bids to monitoring accounts receivable. The fact that he was granted bank signing authority on the company's bank account last year has allowed you to cut a few stokes off your golf game and finally enjoy the fruits of your hard work in building such a solid company.

These could be a set of fairly innocuous circumstances-unfortunately for the company's owner, the situation described above was in fact the setting for at least a half a million dollar fraud. The most unfortunate thing is that the fraud would have been discovered much sooner and the loss greatly reduced had the company implemented some fairly simple internal control improvements.

Internal control often takes a back seat to running your business, but there a few easy steps that you can take to reduce your risk. Here are five:

Understand your existing system

Don't worry- this doesn't mean that you need to become an expert in your company's "percentage of completion" accounting system module. You should, however identify where you think there is risk.

For example, perhaps your biggest concern is front-end loading. Sub-contractors with tenuous cash-flow positions may bill for work that has not yet been completed.

What systems do you have in place to reduce the risk of this happening? Is there a concerted effort made to scrutinize progress files and invoices. Is there a system in place for the comparison of job site activities to the payment of subcontractor invoices?

Whatever the particular issue, make an effort to obtain an understanding of:

  • Who, within your organization, is responsible to monitor the areas that you consider to be at the highest risk for fraud, and
  • What specifically are the control activities.
  • Perhaps most importantly, add a note in your calendar to test check that the controls are being executed.
  • Treat cash with the respect it deserves
  • As with most things in life, there are some things that are "nice to have," and some things that are "must have". With respect to internal control over cash, the following fall into the "must have" category:
  • Timely, monthly bank reconciliations: The preparation, review and approval of the bank reconciliations (i.e., the reconciliation of your bank account balance to your accounting records) is a key control over cash. There is really no excuse for bank reconciliations not to be completed by at least the middle of every month.
  • If you are the person reviewing the bank reconciliation –don't leave them in your in-tray for a week. Timely turnaround to the preparer with any questions will set the tone that you consider it an important component of your internal control program.
  • Have dual signatures for all cheques exceeding a pre-set amount: Business owners should be reviewing and approving any large disbursements. The easiest way to ensure this happens is to have the business owner's signature required for any significant disbursements.
  • Do not pre-sign blank cheques for use when you are away. The reasons for this are obvious.
  • Obtain on-line access to your bank accounts and perform, at minimum, an occasional review of the account. This will allow timely identification of any wires and branch to branch transfers that you may want to investigate.
  • The person who is responsible for cash should not have access to the accounts receivable records. Segregation of duties is difficult for small organizations, but implemented wherever possible.
  • Have controls over who can add an employee to the payroll register. You should also review the payroll register for any new employees on a test basis.

Review your accounts receivable ledger

Lapping is a fraud technique that may be difficult to detect. Lapping involves diverting customer receipts and applying later receipts to the earlier accounts receivable balance. For example, cash received for the receivable related to invoice #100 is stolen by the employee, the amount collected related to the next invoice #101 is applied to invoice #100, the amount collected related to invoice #102 is applied to invoice #101, and so on.

Segregating account receivable collections from the accounting for customer receipts is a good way to detect lapping.

In addition, a business owner's review of the accounts receivable ledger for older receivables may also uncover lapping schemes, not to mention uncover collection issues. A review will also detect any unauthorized credit notes.

Establish specific controls over vendor payments

Controls over your accounts payable do not necessarily have to make the system cumbersome. Some "must-have" controls are:

Supporting purchase orders and invoices should be attached to the cheque for review, prior to obtaining approval and payment.

"Payments by vendor" should be reviewed on a monthly basis. Assign a person outside of the accounts payable function to review a vendor report generated from the accounting system that groups amounts paid by vendor.

Perform sample testing to look for things such as P.O. Box addresses, unusual amounts (too low, round numbers), duplicate payments, unauthorized vendors and other oddities.

Protect your materials at the contract performance stage

Again, understand your biggest risks. You want to minimize fraud risks such as change order abuse, product substitution, conflicts of interest and secret commissions and kickbacks. Are you paying for 10,000 bricks but only need and receive 8,000? Some of the red flags may include changes to orders and the contract, performance variations and a lack of verification of contractor performance. Having an inspector on the job site will reduce the risk of product substitutions and theft. There should also be some oversight of the inspector. Surprise visits to the site should happen no matter how much you trust your employees.

If you have a professional accountant as your controller or CFO, he or she will have training in appropriate internal controls. If you don't already have a documented system, it is your accountant's responsibility to prepare one.

Give the accounting team your support in this task, which may at first, seem monumental. It is up to you to set the tone that short-cuts and overrides to controls are not acceptable.

If you know that your internal control system needs improvement you need to act now. The risk to your company will be reduced by your understanding key areas that need improvement, establishing controls and your oversight to ensure that appropriate controls are implemented and consistently applied.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
 
In association with
Related Topics
 
Related Articles
 
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions