Welcome back Finance Friends! Today we are going to launch our first Finergy Finance Series! Over the next three Finance Friday's we will be looking at a very important topic: Internal Controls and Fraud. Today is the first installment which will be an introduction to the topic.
Every year companies big and small, public and private lose an estimated 5% of their revenues due to fraud. For small companies, this loss could have a detrimental impact on their ability to continue operations. Fraud can hit a company from many angles. Threats come from both internal and external factors. Employees, vendors, customers, websites and emails are just a few conduits that can execute fraud on your company.
Small businesses are more vulnerable to fraud than their larger counterparts for several reasons. A small business has a smaller bottom line. This means a hit to small business will have a bigger impact than a large company. This is not to say that a large company can take on fraud and not be impacted. We know from various news stories that even giants among industries can be brought down by fraud.
Over the years, fraud and internal controls have been brought into the spotlight due to the failing of large public companies. From Enron and WorldCom to the crash of 2008, there has been a lot of focus on the practices of large public companies. In 2002, the government passed the Sarbanes-Oxley Act (SOX) which was put in place to add additional accountability and controls to publicly traded companies. SOX added additional requirements for publicly traded companies. Some of those regulations include management sign-off on financials, separation of duties, and an external audit requirement. Although the act received mixed reviews by companies and investors alike, most say that the Act has helped to reduce fraud.
Privately held businesses are not required to follow the SOX regulations. Owners of these businesses must create their own set of procedures and processes for their company to follow to help eliminate the possibilities of fraud happening at their company. The procedures and processes put in place at a company to help eliminate the potential of fraud are known as internal controls.
Internal controls should be implemented in all businesses no matter how big or how small. These controls will not guarantee that there will be no fraud or theft from your business, but they will make it harder for people to commit fraud or theft. Just like you wouldn’t leave a hundred dollar bill on a table and walk away, you shouldn’t leave your business without any controls. Small businesses can work with their accountants to get help and guidance on the procedures that they can establish.
Over the next couple of weeks, we are going to be looking at fraud and internal controls from a few different angles. Our focus will be to give tips on how fraud happens, how to spot it and tips on how to stop it.
Today we are going to start our journey by looking at some common terms you hear in the news and what they actually mean.
Fraud is considered an intentionally deceptive action designed to provide the perpetrator with an unlawful gain or to deny a right to a victim (investopedia.com). Fraud can occur across industries and businesses. The person who commits fraud has intent. They are purposefully falsifying documents or withholding information.
Embezzlement is a form of “white-collar crime” where a person misappropriates the assets entrusted to him. This is a type of fraud where the assets are attained lawfully, and the embezzler has the right to possess them, but the assets are then used for unintended purposes (investopedia.com).
White-Collar Crime is considered a nonviolent crime committed for financial gain (investopedia.com)
A whistle-blower is anyone who has and reports insider knowledge of illegal activities occurring in an organization. They can be employees, suppliers, contractors, clients or any individual who somehow becomes aware of illegal activities taking place in a business (investopedia.com).
Internal Controls are methods put in place by a company to ensure the integrity of financial and accounting information (investopedia.com).
Audit Trail – leaving documentation behind to show the transactions that took place.
Next week we will look at how fraud can take place at your company. Then come back again the following week to see methods you can put in place in your business. If you have questions on how to protect your business reach out to a professional who can provide you with personalized assistance with your business.
See You Next Week!
**We hope you enjoyed our blog. Please note that the intent of this blog is to provide general information and should not be construed as financial, financial tax, accounting, legal, consulting or any other type of advice regarding any specific facts and circumstances, nor should they be construed as advertisements for financial services.
We used the following resourcing in pulling together our Internal Controls and Fraud Series! Check them out for more information!
Mastering Internal Controls and Fraud Prevention: by the AIPB
Small Business Financial Management kit for Dummies :by Tage C. Tracey and John A. Tracy