5 Essential Tips for Mitigating Fraud with Internal Controls

Yet again, we see another instance of fraud committed by an individual in a position of trust. Recently, the Florida Department of Law Enforcement (FDLE) arrested a Wauchula man for allegedly defrauding his employer, a school, of over $50,000. According to the complaint, "...Gray, as the sole bookkeeper for the school, was using a school credit card to make unauthorized purchases for personal gain" to the tune of $300,000 over 5 years underscores the critical importance of implementing strong internal controls to prevent such fraud from occurring in the first place.

Fraud is a significant concern for businesses of all sizes, and the repercussions can be devastating. Whether it's financial loss, reputational damage, or legal consequences, fraud can undermine the very foundation of an organization. Implementing robust internal controls is crucial for mitigating the risk of fraud. Internal controls not only safeguard assets but also ensure accurate and reliable financial reporting, compliance with laws and regulations, and efficient operations.

Here are five essential tips on how to mitigate fraud by implementing internal controls, along with recommendations for tools like BILL Payables & Receivables,  BILL Spend & Expense, and ApprovalMax to streamline these processes.

1. Segregation of Duties

One of the most effective ways to prevent fraud is by implementing the segregation of duties (SoD). This principle ensures that no single individual has control over all aspects of a financial transaction. By dividing responsibilities among different members of your accounting team and beyond, you can reduce the risk of fraud and errors. For example, the person who processes payments should not be the same person who approves them.

Many small businesses do not have enough team members related to a particular transaction function to be able to segregation effectively. One solution may be to partner with an outsourced accounting company like Basis 365 Accounting. All of our customers have a fractional team of three to four team members. This team, plus employees of the company, help provide enough segregation to mitigate fraud. 

Practical Application:

• Outsourcing: Partner with a fractional accounting department company to include more team members into the segregation of duties workflow. 

• Accounts Payable: Use tools like BILL Payables & Receivables to automate the workflow between team members. With BILL, you can set up workflows where different team members are responsible for creating, approving, and paying invoices. This not only enforces SoD but also provides a clear audit trail for every transaction. 

2. Implement Approval Policies

Establishing approval policies is another critical internal control. While segregation of duties tends to imply approval policies, there is more to the topic. Approval policies dictate the conditions under which transactions can be executed, such as requiring managerial approval for expenses over a certain amount. This adds an additional layer of oversight, ensuring that transactions are scrutinized before they are completed. 

This goes beyond having more than one person involved to mitigate fraud; approval policies can have different branches to ensure the right people, not just more people, are involved in the execution of a transaction. 

Practical Application:

• Approval Policies: Set up Policies in BILL Payables & Receivables to set up different workflows for specific scenarios. You can include your Purchases team on certain vendors involved with those invoices while another team member may need to approve invoice payments over $50,000. Try to keep policies simple to start and add on complexity when needed. Some companies start with an overly complex workflow which can be confusing to the team.

BILL Accounts Payable & Receivable Policy

• Complex Accounts Payable Processes: If your accounts payable process involves more complexity, such as the use of purchase orders (POs), consider integrating an app like ApprovalMax. ApprovalMax extends your internal controls and workflows by allowing you to create multi-step approval processes that include POs, bills, and expenses. This ensures that every step in your purchasing and payment process is tightly controlled and transparent, helping to prevent fraud and errors in more complex environments. This is also helpful if you do not plan to use BILL Payables & Receivables. Using a best of breed application like ApprovalMax allows you to remain payment solution agnostic.

ApprovalMax Granularity

ApprovalMax PO Matching

• Expense Management: Another common payment method is the company credit card. Most companies have no approval solution for corporate cards. Utilize BILL Spend & Expense to manage credit card purchases and other expenses. This tool allows you to set up approval workflows that align with your company’s policies. For example, you can require approvals for any expenses exceeding a predefined threshold. The system will automatically route these transactions to the appropriate approvers, reducing the risk of unauthorized spending. These applications also allow users to attach receipts for company records.

BILL Spend & Expense Policy

3. Regular Reconciliation and Monitoring

Regular reconciliation and monitoring of accounts are crucial for detecting discrepancies and potential fraudulent activity. By comparing internal records with external statements, such as bank and credit card statements, you can identify and investigate any inconsistencies promptly.

Practical Application:

• Bank Reconciliation: The reconciliation process allows the reconciler to look at the accounting activity and compare it against the third party statements. This could identify unexplained payments or anomalies that would not be caught if nobody is checking against the source.

• Bank Reconciliation: With BILL Payables & Receivables and BILL Spend & Expense, you can automate the reconciliation process. The platform allows you to sync your bank accounts and reconcile transactions in real-time, ensuring that your records are always accurate and up to date. Any discrepancies can be flagged and reviewed by management immediately, providing an additional layer of security.

4. Enforce Strong Password Policies and Access Controls

Access to financial systems and sensitive information should be restricted to authorized personnel only. Implementing strong password policies and access controls can prevent unauthorized access to your financial systems, which is a common way fraud is perpetrated.

Practical Application:

• Access Controls: In tools like BILL Spend & Expense and BILL Payables & Receivables, you can enforce access controls by assigning specific roles and permissions to users. For example, only designated individuals can approve transactions or access sensitive financial data. This ensures that only authorized personnel have access to critical information, reducing the risk of internal fraud.

• Read-Only Access: When inviting bookkeepers or other team members into accounts, start off with read-only access first. Many accounts will allow that user to see activity and statements without having any ability to access funds. Too often, business owners, due to lack of time, give full access as that’s easier than navigating the back-end system for the correct rights. Although that saves time up front, it may be much more costly in the long run. 

5. Conduct Regular Audits

Regular audits, both internal and external, are vital for identifying potential weaknesses in your internal controls and ensuring compliance with your fraud prevention policies. Audits can help detect unusual patterns or transactions that may indicate fraudulent activity.

Practical Application:

• Audit Trail: BILL Payables & Receivables and BILL Spend & Expense offer comprehensive audit trails that document every action taken within the system. These trails can be reviewed during audits to ensure that all transactions have been properly authorized and executed according to your internal policies. Regularly reviewing these audit trails can help you identify any irregularities and take corrective action before any fraud can occur.

• Financial Statement Audit: Most audits by CPA firms are initiated by a third party, likely a bank or government requirement. Although the purpose of an audit is not to detect fraud, there are several tests performed by auditors that may identify fraud. Knowing the company’s financials will be audited could help prevent fraud due to the fear the perpetrator may be caught. 

Conclusion

Fraud prevention is an ongoing process that requires a combination of strong internal controls, regular monitoring, and the right tools. By implementing segregation of duties, establishing approval policies, regularly reconciling accounts, enforcing access controls, and conducting audits, you can significantly reduce the risk of fraud within your organization.

Tools like BILL Payables & Receivables, BILL Spend & Expense, and ApprovalMax can streamline these processes, making it easier for you to enforce internal controls and protect your business from fraud. By leveraging these technologies, you can maintain the integrity of your financial operations and safeguard your organization's assets.

In today’s fast-paced business environment, it’s essential to stay vigilant against fraud. Implementing these tips and utilizing the right tools will help you build a robust internal control framework that not only mitigates fraud risks but also enhances the overall efficiency of your financial operations.

Learn more about Basis 365 Accounting’s fully managed Accounts Payable services.