Suggest appropriate control procedures that would have prevented or detected the theft of cash

Overview

There are two basic categories of internal controls – preventive and detective.  An effective internal control system will have both types, as each serves a different purpose.  As you perform routine processes, or when you are thinking of implementing a new procedure or process, it is important to ask the following questions to help determine the appropriate control:

• What could go wrong?
• What steps have been taken to ensure that something does not go wrong?
• How can you verify that nothing went wrong?

The answers to these questions will enable you to better target the type of control that is needed.

Preventive Controls

Preventive controls aim to decrease the chance of errors and fraud before they occur, and often revolve around the concept of separation of duties. From a quality standpoint, preventive controls are essential because they are proactive and focused on quality.

Examples of preventive controls include:

• Separation of duties
• Pre-approval of actions and transactions (such as a Travel Authorization)
• Access controls (such as passwords and Gatorlink authentication)
• Physical control over assets (i.e. locks on doors or a safe for cash/checks)
• Employee screening and training (such as the PRO3 Series to increase employee knowledge)

Detective Controls

Detective controls are designed to find errors or problems after the transaction has occurred.  Detective controls are essential because they provide evidence that preventive controls are operating as intended, as well as offer an after-the-fact chance to detect irregularities.

Examples of detective controls include:

• Monthly reconciliations of departmental transactions
• Review organizational performance (such as a budget-to-actual comparison to look for any unexpected differences)
• Physical inventories (such as a cash or inventory count)

Last Reviewed

04/30/2022: reviewed content

Training

PRO303: Internal Controls at UF

University Controller’s Office: (352) 392-1321

Employee fraud is a key concern for many businesses, regardless of the size or type. It may include asset misappropriation, financial statement fraud, and corruption. With proper fraud detection and prevention techniques, you can reduce the overall occurrence of fraud. This article outlines six ways to prevent fraud in your company.

1. Leverage an ethics hotline
   An ethics hotline is a technique used by employees and other stakeholders in a company to report fraud, abuse, waste, misconduct, abuse, violations, misconduct, and other inappropriate behavior. Ethics hotlines can be anonymous telephone lines to call and leave messages with an operator or online forms that you can fill and submit. You can establish an ethics line to reduce fraud costs and detect fraud faster.

   Ethics hotlines enable you to track your business from your employees’ perspective without them fearing the consequences. In-house hotlines might not protect your company fully. However, third-party whistleblower hotline services make your staff feel safer and more confident to report because they are less likely to be identified and receive retaliation.

2. Know your employees
   Every business strives to recruit honest and trustworthy employees to avoid fraud. Do background checks on all employees managing payments or handling cash. As their interaction with the finance department intensifies, so should the focus on the past and present financial situation. Follow up on references to ensure potential employees’ qualifications are honest. This gives you an excellent chance to prove their honesty. Upon hiring new employees, interact with them to know them better.
3. Conduct regular audits
   Companies should frequently audit finance-related areas, including refunds, cash, inventory management, product returns, and accounting functions. This enhances fraud detection and prevention. Regular impromptu audits can help you detect high-risk fraud in crucial business areas. Regular auditing of your books enables you to identify fraud risks and establish controls to avoid losses.
4. Segregate accounting and bookkeeping duties
   Many small companies have one accounting personnel who always takes on all the bookkeeping tasks, including processing customer payments, receivables, invoice payments, petty cash management, and entering them into the accounting system. As such, fraud cases can quickly go unnoticed.

   However, two or more accounting and bookkeeping persons handling company finance tasks and responsibilities interchangeably can reduce the chances of fraud. You can also separate accounting and cash handling functions or outsource these functions.

5. Implement internal controls
   Implementing internal control programs and systems safeguard your business assets, ensure your accounting records’ integrity and detect and prevent theft and fraud. Documenting your financial documents, such as sales receipts, is an internal control that can help you mitigate fraud. Ensure your internal control systems and programs are monitored and amended regularly to increase effectiveness and remain up-to-date with technological advancements.

   Suppose you don’t have fraud detection and prevention programs in place. In that case, you can hire internal control professionals to assess your company’s procedures and policies, then recommend appropriate measures and help you implement them.

6. Secure credit card data
   Credit card fraud is a common type of fraud among companies that accept digital payments. Failure to protect customer and business credit card information may result in breaches, leading to loss of funds. Separate your business accounts to ease the tracking of expenses. Beware who can access credit card data and secure online payment services to prevent fraud and protect your business from hackers.

Fraud can be detrimental to your business’s bottom line and survival. Use these tips to prevent it from occurring in your company.

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