Acts of fraud, both internal and external, is a growing problem for businesses, with 49 percent of global organizations reporting they experienced economic losses due to fraud, according to a 2018 global study performed by PwC. However, the likely amount of businesses that are victims of fraud is most likely much higher as many businesses, especially smaller operations, don’t have the tools in place to determine if fraud exists to begin with. Fortunately, there are basic anti-fraud controls, also called internal controls, you can implement to prevent or detect fraudulent activities.

What Are Internal Controls to Prevent and Detect Fraud? 

Fraud is the act of deceiving another in an attempt to gain something of value. This can be false financial reporting, asset misappropriation, or gaining resources under false pretenses. Internal controls are designed to do two things: 

  1. Prevent individuals, both within and outside the organization, from committing fraud against the organization. 
  2. Detect when fraud does occur so losses can be mitigated and illegal or unethical activity can be stopped immediately.

Five Anti-Fraud Controls to Implement Immediately

Robust Code of Conduct

While recent years have seen a spike in fraud perpetrated by external sources, fraud committed internally is still a threat for many companies. Employees have access to information and resources and have greater opportunity to manipulate these things in order to commit fraud. Having a robust code of conduct in place lets your team know from day one that ethical behavior is expected from everyone, from the top down. This doesn’t mean your code of conduct needs to be punitive and threatening. In fact, creating a positive, ethical culture within the company can improve morale as well as create a foundation of reducing fraudulent activity and internal theft.

Separation of Functions 

When one person is responsible for transactions from beginning to end from creating invoices to logging cash receipts and finalizing payments, that individual has the opportunity to manipulate the information with little to no risk of being caught. By separating functions and dividing up transaction processing, there is greater opportunity to include different organizational units and create a system of “checks and balances,” so to speak, so no one person is responsible for the entirety of each transaction.

Certifying and Auditing Financial Statements

Working with an experienced external CPA firm who can generate and audit financial statements makes it possible to detect fraud early. They can spot discrepancies in income statements, cash flow statements, and other financial reports and bring these to your attention quickly. Our CPA firm provides comprehensive financial statement services, including preparing your statements to ensure accuracy as well as review or audit existing statements to ensure your records are conducted and created in accordance with generally accepted accounting principles. 

Testing and Evaluating Internal Controls

Having internal controls in place is important, but working with an external CPA to test and evaluate the effectiveness of these internal controls is a necessity. Our CPA firm works with management teams to determine existing controls and creates a way to test and evaluate them to ensure there are no gaps or faults that could allow fraudulent activities to occur or go undetected. This includes evaluating how transactions are processed and procedures in place for keeping financial records and generating statements. 

Fraud Risk Assessment Consulting

Even though you know your business inside and out, having an external, unbiased consultant provide a fraud risk assessment can open your eyes to any potential threats you may be facing, both internally and externally. After the assessment, a CPA or other assessor can provide you with the steps you need to take to protect your business more effectively.

Schedule an Anti-Fraud Control Consultation with Our CPA Firm in Raleigh 

You’ve worked hard to build and grow your organization, and our CPA firm in Raleigh can help you keep it secure and strong. Learn more about how we can help you implement internal controls to minimize your risk of fraud. Schedule a consultation today by calling us at  (919) 872-0866 or filling out the form below to learn more.

Frequently Asked Anti-Fraud Questions

What is the difference between external and internal fraud?

While internal fraud is the result of actions by one or more individuals within the company, and can be combated and prevented with steps like codes of conduct and separation of responsibilities, external perpetrators are more difficult to handle, because of their position outside of the company. They might take the form of a hacker, customer, vendor, organized crime group, or a variety of other sources. In 40% of cases of fraud from outside sources, a digital platform was involved, like social media sites or e-commerce software. 

Do companies experience more internal or external fraud?

In the past, internal fraud was more common in many companies experiencing the issue. However, with the increase in reliance on digital platforms thanks to factors like COVID-19, as well as opportunities for fraudsters to connect via chat rooms and other tools of a growing digital crime economy. According to a 2022 PwC report, 70% of organizations reported that the most disruptive cases of fraud came from either solely external sources, or from a combination of the two. 

How to combat or prevent external fraud?

Just as with internal fraud, working with an external CPA firm can help you monitor financial statements and spot any discrepancies as soon as possible. They can also help you test your systems in place for preventing fraud, and develop strategies to reduce the risk of external fraud.

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