Occupational fraud is a serious threat with costly consequences, but with strong internal controls, this threat can be reduced. Companies with weak internal controls might not prevent or detect fraud and open themselves up to possible management override of controls. Well-designed, effective internal controls should be proactively implemented to reduce these risks.
Internal controls can be designed to prevent or detect fraud. Preventive controls include segregation of duties, authorization, and physical control over assets, just to name a few. These controls aim to stop fraud from occurring. Examples of detective controls can include reconciliations, inventory counts, and review processes. These controls aim to detect fraud that has occurred.
Simply having internal controls such as the ones previously listed is not sufficient enough to combat the risk of fraud. The internal controls must be well designed and operating effectively. A well-designed internal control is unavailing if it is not operating in the manner intended. Likewise, an internal control that operates effectively is meaningless if the control was not designed well. It is important to identify the opportunities for fraud in a company and then design the internal controls to address those opportunities.
Even with a seemingly strong system of internal controls, there is the risk of management override of controls. Having a tone at the top that strongly encourages ethical behavior is one way a company could help mitigate the risk of management override. Additionally, having an internal audit function can assist management in identifying weak areas open to management override. There is no way to eliminate this risk, but companies can use tactics such as these to reduce the risk to a low level.
All companies are susceptible to occupational fraud and should take measures to address this risk. A strong system of internal controls that are well designed and operating effectively is the key way to mitigate the risk of fraud to a company. An internal audit function can be utilized to strengthen the internal control system. In addition to this, a clear ethical tone at the top is necessary. The threat of fraud cannot be eliminated, but you can take action now by implementing a strong internal control system.