Fraud is more common than many people realize. Small businesses and start-ups are the most affected by the financial losses caused by fraud. A report by the Association of Certified Fraud Examiners (ACFE) found that the lack of fraud prevention and detection is what makes small companies vulnerable to fraud.
The first line of defense against fraud is the implementation of data security controls. These controls help ensure your company is operating within the law, your information is secure, and no one can take advantage of vulnerabilities in your system.
What Are Data Security Controls?
Data security controls are countermeasures against data breaches. These controls ensure the safety of sensitive information. These internal controls support risk management programs by detecting, minimizing, counteracting, or preventing security risks to data, networks, computer systems, and software.
These controls can be detective, preventative, compensatory, or corrective. Adequate data security controls provide accurate financial reports according to the industry standards governing capital, investment, and credit risks.
How Can You Create Internal Controls?
Internal controls should be implemented based on compliance, data security, taxes, and fraud protection, among other things. The following are some tips on creating adequate internal controls.
1. Compliance
The first step in creating internal controls is familiarizing yourself with the laws that affect your business. This way, you’ll be able to ensure your business complies with their requirements. For example, are your procedures for managing and storing customer credit card data compliant with the laws?
Failing to abide by the laws and regulations affecting your business can be expensive, time-consuming, and damaging to your brand. Moreover, many of your business partners and stakeholders will require you to comply with the Generally Accepted Accounting Practices (GAAP). Therefore, make sure you and your team understand all the compliance measures required in your industry.
2. Taxes
Make sure you have a reliable CPA. A good CPA will ensure you address sales, payroll, income, and taxes correctly. It’s crucial for you to know what rules affect your business and the process of paying taxes. Knowing the frequency for paying taxes and developing a system where your CPA can produce confirmation of tax payments is also important. Make sure your internal control measures address the timely payment of taxes.
3. Documentation
It would be best if you were vigilant in creating documentation for your company’s processes. Documentation should be applied to different areas of your business. For example, you need to have well-documented policies for new employees. After hiring a new employee, you should present them with written guidelines for activities such as accounting and data security.
Another area where documentation is essential is financial transactions. It would be best if you enforced rules on documented evidence for all financial transactions. All invoices, quotes, checks, and statements should be supported with documentation. For example, before the money is reimbursed for expenses, an expense report should be accompanied by receipts and permitted by the management.
4. Communication
Internal policies are most effective when there’s transparency. You need to foster an environment where employees can voice their concerns and report any alarming incidences. It would be best if you recruited competent and conversant members with the company’s policies and procedures. It’s also crucial for employees to know where to take their complaints or concerns.
5. Data Security
You need to have controls that ensure data security. For example, you should develop policies on how to store confidential files. Private information should be locked away in filing cabinets or any other secure location. Additionally, IT accounting systems should be password protected. You should implement strong password management policies to protect sensitive data.
6. Fraud Protection
One of the best ways of preventing fraud is by the segregation of duties. You shouldn’t assign one person to an entire transaction process. You need to develop policies that ensure funds are disbursed and deposited appropriately. For example, the check-writing process mainly involves the accountant and the manager of a company.
In the spirit of segregation of duties, assign one person to count the money and another one to make deposits. You should also encourage two signatures on checks. You can use a similar policy for payrolls and accounts payable. Having different personnel dealing with varying aspects of a transaction makes it easy to trace fraudulent activities.
8. Error Catching
Internal controls should help you detect errors in time. One of the best ways to catch errors is through regular bank reconciliation, cash, and credit card accounts. Determine whether people are paying on time and if automatic charges are accounted for.
It’s advisable to delegate a person outside the reconciliation process for the review, signing, and dating of the reconciliation. This person will be able to verify that the review has been completed satisfactorily and all discrepancies were resolved.
In Conclusion
Implementing internal controls is one of the best ways to address fraud in your business. These controls should be spread across different aspects of your business, from administration to business operations. Most importantly, you need to monitor your internal controls regularly. This will help you review the effectiveness of the controls and update them according to the emerging threats to your business.
