why it is so important for a business to set up internal control measures
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Businesses with fewer than 100 employees accounted for the highest percentage of fraud instances and higher median loss than their larger counterparts, as reported by the Association of Certified Fraud Examiners (ACFE).
The ACFE has classified fraud into three categories:
Misappropriation of Assets – stealing or misuse of an organization’s resourcesCorruption – an employee using their influence in business transactions in a way that violates their duties in order to obtain a benefit for themselvesFinancial statement – involves the intentional misstatement or omission of material information from financial reports
Fortunately, there are steps your company can take to help prevent and detect fraud. The most important step for any small business owners is to implement properly designed internal controls.
Internal controls are procedures or processes put in place by a business to:
Safeguard assetsEnsure financial reporting is accurate and meet all financial reporting requirementsEnsure compliance with operational requirements
There are five factors necessary for establishing effective internal controls.
Segregation of DutiesPolicies and ProceduresDocumentationOversight and ReviewUser Access and Rights
SEGREGATION OF DUTIES
Creating separation or segregation of duties entails the assignment of the various components of a process to different employees. Proper segregation of duties should ensure that different people should be responsible for authorizing transactions, recording transactions, maintaining custody of related assets and reconciling account balances. If a single employee is responsible for all these tasks, that person is in a position to perpetuate and conceal fraud.
While larger companies with thousands of employees can easily segregate duties, small companies that don’t have a large enough in-house staff can outsource one or more of these duties. Public accounting firms offer accounting services to small and medium size companies. The Company can outsources some of these functions to the CPA firm and obtain a level of expertise not available from their in-house staff.
POLICIES & PROCEDURES
All businesses should have written policies and procedures—even if you think your business operations are uncomplicated. Although businesses are different, the following common processes should always be documented:
Sales and Accounts ReceivableCash and BankingPurchases and Accounts PayablePayroll and Human ResourcesFinancial Statement Closing and Reporting
The policies and procedures for each process should include all the tasks and steps needed to complete a process. Documenting each process provide transparency and consistency and allow for specific duties to be easily assigned to separate individuals. Detailed policies and procedures also facilitate the training of new or temporary employees.
DOCUMENTATION
While it might seem obvious, maintaining adequate supporting documentation is essential to developing effective internal control. All transactions must be documented in sufficient detail to allow management to support the existence of the transaction. Standardized documentation enable faster and more efficient review of accounting documents by management and is an important aspect of fraud detection.
Thorough, standardized documentation also allows for discrepancies and errors to be more easily identified. Not having standard documentation for all internal accounting procedures puts you at risk of errors and that fraudulent activity will go unnoticed or overlooked.
OVERSIGHT & REVIEW
The best way to reduce the risk of fraud is management oversight and review; in other words, showing your employees that you are checking up on them and reviewing documentation. In most fraud cases, the employee was allowed to perform their duties without oversight or review which enable them to perpetuate the fraud over an extended period of time.
Management must be committed to implementing and following their own internal controls. The tone is set at the top. They should review financial reports periodically and on a random basis which includes identifying significant variances and the reason for the variances.
USER ACCESS & RIGHTS
Another important consideration for preventing potential fraud and maintaining security within a business is the prevention of any unauthorized access to the key databases, systems, and programs used for accounting .
Hope it helps u..........
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The ACFE has classified fraud into three categories:
Misappropriation of Assets – stealing or misuse of an organization’s resourcesCorruption – an employee using their influence in business transactions in a way that violates their duties in order to obtain a benefit for themselvesFinancial statement – involves the intentional misstatement or omission of material information from financial reports
Fortunately, there are steps your company can take to help prevent and detect fraud. The most important step for any small business owners is to implement properly designed internal controls.
Internal controls are procedures or processes put in place by a business to:
Safeguard assetsEnsure financial reporting is accurate and meet all financial reporting requirementsEnsure compliance with operational requirements
There are five factors necessary for establishing effective internal controls.
Segregation of DutiesPolicies and ProceduresDocumentationOversight and ReviewUser Access and Rights
SEGREGATION OF DUTIES
Creating separation or segregation of duties entails the assignment of the various components of a process to different employees. Proper segregation of duties should ensure that different people should be responsible for authorizing transactions, recording transactions, maintaining custody of related assets and reconciling account balances. If a single employee is responsible for all these tasks, that person is in a position to perpetuate and conceal fraud.
While larger companies with thousands of employees can easily segregate duties, small companies that don’t have a large enough in-house staff can outsource one or more of these duties. Public accounting firms offer accounting services to small and medium size companies. The Company can outsources some of these functions to the CPA firm and obtain a level of expertise not available from their in-house staff.
POLICIES & PROCEDURES
All businesses should have written policies and procedures—even if you think your business operations are uncomplicated. Although businesses are different, the following common processes should always be documented:
Sales and Accounts ReceivableCash and BankingPurchases and Accounts PayablePayroll and Human ResourcesFinancial Statement Closing and Reporting
The policies and procedures for each process should include all the tasks and steps needed to complete a process. Documenting each process provide transparency and consistency and allow for specific duties to be easily assigned to separate individuals. Detailed policies and procedures also facilitate the training of new or temporary employees.
DOCUMENTATION
While it might seem obvious, maintaining adequate supporting documentation is essential to developing effective internal control. All transactions must be documented in sufficient detail to allow management to support the existence of the transaction. Standardized documentation enable faster and more efficient review of accounting documents by management and is an important aspect of fraud detection.
Thorough, standardized documentation also allows for discrepancies and errors to be more easily identified. Not having standard documentation for all internal accounting procedures puts you at risk of errors and that fraudulent activity will go unnoticed or overlooked.
OVERSIGHT & REVIEW
The best way to reduce the risk of fraud is management oversight and review; in other words, showing your employees that you are checking up on them and reviewing documentation. In most fraud cases, the employee was allowed to perform their duties without oversight or review which enable them to perpetuate the fraud over an extended period of time.
Management must be committed to implementing and following their own internal controls. The tone is set at the top. They should review financial reports periodically and on a random basis which includes identifying significant variances and the reason for the variances.
USER ACCESS & RIGHTS
Another important consideration for preventing potential fraud and maintaining security within a business is the prevention of any unauthorized access to the key databases, systems, and programs used for accounting .
Hope it helps u..........
plz mark me the brainliest..
vivekkumar6115:
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