The Importance Of Internal Control In Preventing Fraud In Organizations

Features of Internal Control

Question:

Describe about the Implement and Maintain Internal Control Procedure?

One of the major objective of the internal control is helps the employees and the owners to understand the attitude of organisations as whole (Albrecht, 2009).  Internal control set protocol and procured for the employees to perform day to day transaction and duties.  Internal control helps to prevent and reduce the fraud.

Apart from that, internal controls aim the entity to run the business efficiently and effectively.  However, internal control measures are not built in overnight but it is one consentient process which ultimately given the entity to build the organisations structure (Bebbington et al.  2010). An internal control is a very much governance the risks and counter the threats to improve the performance of the organizations in future.

The five major features of the internal control system help the entity or owner to manage the internal control. These internal control features are monitoring, controlling the several transactions, information’s, communications and finally the assessing the risk (Benedict and Elliot, 2011). Monitoring is very much help in reviewing the employee performance along with that it also help in controlling the transactions   that ultimately seek the information for communications.

Cost versus benefits relationship

 Since the organization has various cost benefit analysis by implementing the internal control. One of the major costing would be hiring of extra personnel for the monitoring the duty along with equipment like computer based billing are increasing the cost of the(Berry, 2009).  organizations . However, one of the major benefit would be entity would be able to keep track record of the expenditure, sales and employee absenteeism. This benefit would help the organization to control take over the control of entire process. These recurring cost will double the profit in near future for the organization (Bhattacharyya, 2010).

Two benefit of cost benefit relationship

Reducing the work pressure: One of the cost benefit relationship would be it will help the entity to increase the efficiency of human resources by decreasing the work pressure via implementation of computer based network (Bienstock and Mentzer, 2008).

Detect error: Prevent the error and irregularity which will increase the productivity of the organizations (Brigham, 2010). The entity may face various error like transaction error and human error which can be corrected via internal control system.

• Internal auditors maintain the expenditure and sales day books in order to manage day to day transactions of the organisations (Donelson et a n.d.).
• Managing the expectation of the stakeholders via regular communications.
• Assessing the risk on the key business activities using the collected financial information
• Prepare of financial report and identifying the issues within the business to make improvements in operations and productivity among the employees (Finley, 1994).
• Recommending for the suitable alternative options to the entity to increase the profitability and productivity of the company (Janvrin, 2003).

Employee’s fraud: As per the case given both of the companies is facing the problem of internal control.  One of the Booker of the fast track company has conducted the fraudulent within the company via duplicate payment to supplier receipt and distributed among its friends (Janvrin, 2003). This is employee’s fraud which is raised due to lack of the control over the organizations. There has been numerous occasion where the employees or say bookkeeper does money embezzlement under the nose of the entity (Lenard et al. 2013). Here the employee Ms Simpson, and Mr. Oakley has done the billing the fraud which is also known as the employee fraud.  This is due to the manual handling of the transactions. Company is been suffering the entire loss due to tampering of the financial obfuscations (Rae and Subramaniam, 2008). This fraud is done by the employees because of the open access to blank cheques and financial records and cash. Apart from that manager does not verify or approve the discounts and credit memos which ultimately lead to employee fraudulent (Smith et al.  n.d.).

Cost vs. Benefits Relationship

Accounts payables fraud: This type of fraud is generally done by the employee under the nose of the entity. Billing fraud is done by Ms. Simpson and their colleagues are taken the advantages of the entity and lack of proper internal control over the organizations (Vinten and Greening, 2001). All goods within the Fast track are been kept with the clerk who are responsible for the signing and receiving the slip  are   one of the major reason for fraudulent of billing within the Fast Track organizations (Hashemi,  2008).

Apart from that the manager of the company is always been busy and sign the cheques  and hand them to book peer  who does the fraudulent and filed the invoices as  per his wish (Balakrishnan and Sivaramakrishnan, 2008). Here, no billing or review of the vendor transactions with invoice numbers because the manager sis quite busy with other things. Lastly, No review of the vendor monthly statements for outstanding items has incurred the loss for the managers which create big losses in future (Hashemi,  2008).

Implement the internal control:

Internal control and programmes  helps to safeguard the company asset and cash from the fraud and theft.  Internal control is based on the few steps which helpful in reducing the error and detect the fraud within the organizations structure (Vinten and Greening, 2001).

Figure 1: Steps in internal control

(Source: Rae and Subramaniam, 2008, pp-104)

With the help of internal control functions adequate control hells the managers to delegate the responsibilities among the employees and set the benchmarking within their work. Internal control will helps to detect the fraud by establishing and maintaining the people at all level within the organizations (Lenard et al. 2013).  Internal control can increase the cost of the company but it helps the entity to cost effective in future. Internal control avoids the fraudulent which is been happen in the above case study of Fast track book keeper. Internal creates documentations of receipt and preparation of bank deposit within the books of accounts which reduce the employee fraud within the organizations (Janvrin, 2003).  In additions to that, internal control will make sure that, deposit stamps in the entire incoming cheques are manage as per the order and also requires two signature which alert the manager about the fraudulent among the employees. 

Computer based billing: Computer based billing helps manager to check the order and invoice which will receive the billing or accounts payables fraudulent. Computer based network will helps the company to make the monthly Du Pont analysis which help[s the fraudulent of invoices which has been done by the employees within the Fast track book keeper. Computer based transaction helps the manager detect the fraud in the manual transaction which can be caught at any time soon. This will reduce the human error and detect the fraud.

Hire experts: hiring an expert like CFA and CPA would give the organization additional benefit of the ethical accounting which will reduce the fraudulent conducted by the employees. Most of the employees are very much try taking advantages of entity because of the lack of expert in the area of accounting (Finley, 1994). Using GPPA method in accounting will help the Fast track to keep track of the expenditure and the actual cost which will help the company to reduce the error of principles, error of mission, error of commission within the financial statements. This will set the positive work environment that prevents employees from the fraud and theft.

Reference List

Albrecht, W. (2009). Financial Accounting. 3^rd ed. New York: John Wiley & Sons.

Bebbington, J., Gray, R. and Laughlin, R. (2010). Financial Accounting: practice and principles. 7^th ed. Bedford, London: Thomson Learning.

Benedict, A, and Elliot, B., (2011). Financial Accounting: An Instruction. 5^th ed. Mason: South-Western Cengage Learning.

Berry, A., (2009). Financial Accounting: an introduction. 4^th ed. California: Random House.

Bhattacharyya, A. K. (2010) Principles and Practice of Cost Accounting, 2^nd ed. Oxford: Butterworth Heinemann.

Bienstock, C. C. and Mentzer, J. T. (2008) Sales Forecasting Management, Thousand Oaks, CA: Sage Publications

Brigham, E. (2010) Financial Management: Theory and Practice. 5^th ed. London: Routledge.

Donelson, D., Ege, M. and McInnis, J. (n.d.). Internal Control Weaknesses and Financial Reporting Fraud. SSRN Journal.22-45

Finley, d. (1994). Game Theoretic Analysis of Discovery Sampling for Internal Fraud Control Auditing. Contemporary Accounting Research, 11(1), pp.91-114.

Janvrin, D. (2003). St. Patrick Company: Using Role Play to Examine Internal Control and Fraud Detection Concepts. Journal of Information Systems, 17(2), pp.17-39.

Lenard, M., Yu, B. and York, E. (2013). Do Discretionary Accruals Help Distinguish between Internal Control Weaknesses and Fraud?. International Business Research, 6(12).

Rae, K. and Subramaniam, N. (2008). Quality of internal control procedures. Managerial Auditing Journal, 23(2), pp.104-124.

Smith, R., Tiras, S. and Vichitlekarn, S. (n.d.). The Interaction Between Internal Control Assessment and Substantive Testing in Audits for Fraud. SSRN Journal.

Vinten, G. and Greening, M. (2001). Internal Control and Fraud in the Smaller Building Society. Journal of Financial Crime, 8(3), pp.201-205.

Hashemi,  S. A. (2008) Analyze the relationship  between operating cash flows and accruals, operating cash flow forecasting model, according and Auditing Review, 38, 1-24.

Balakrishnan, R. and Sivaramakrishnan, K. (2008) A critical overview of the use of fullcost data for planning and pricing. Journal of Management Accounting Research, 14: 3-31.