Why are internal controls necessary?
Properly implemented internal controls are essential for deterring fraud, misappropriation of assets or fraudulent financial reporting. The “Fraud Triangle,” is a model used to explain the factors contributing to fraud and consists of three components: motivation, opportunity and rationalization. Motivation may be personal financial pressure (misappropriation) or the need to boost results to meet an organizational goal (fraudulent financial reporting). Opportunity is created by a lack of oversight (infrequent internal reporting to the board) or unimpeded access to resources (check signing authority coupled with responsibility for reconciling the bank account). And, because most people don’t think of themselves as crooked, rationalization is the bad actor’s ability to excuse the fraud. It is important to understand the concept of the Fraud Triangle to assess where your organization’s internal controls may fall short.
A few suggested procedures include:
Test, test, test. Consider what you are testing, and refresh your tests as necessary, when procedures change or the means of tests become familiar. Make sure that the tests you run are designed to identify: