Fraud prevention and internal risk assessments

The Latest Rules and Regulations That Impact Your Government Entity

Over the last few decades, we have witnessed countless accounting scandals break the news and catch us all by surprise. These scandals have probably left us wondering, “Is this something that could happen to my company too?” Scandals like Enron, the Lehman Brothers, Bernie Madoff and WorldCom are just the tip of the iceberg when it comes to fraudulent activity occurring in businesses. Those companies clearly needed internal risk assessments.

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Fraud is extremely difficult to detect, and even a strong internal control system cannot guarantee no fraudulent activity. The good news is that being aware of what types of fraud your company is susceptible to can help you implement the right internal controls.

During our risk assessment portion of the audit, we investigate an entity’s internal controls and make sure that they are working as the entity intends them to. In some cases, we make recommendations if we see areas of concern within your internal controls. However, this applies to the regular, day-to-day activities of a government. Here are some scenarios that governments may face that increase the possibility of fraud:

  • Large amounts of related party activities
  • Poor IT systems and security
  • New programs where effective controls are not in place yet
  • Management override of controls on the grounds of urgency
  • High turnover rate or frequent reassignment of key employees
  • Disgruntled employees who are dissatisfied with factors of the job

This list is not comprehensive, but these scenarios can either create larger opportunities or a greater incentive to commit fraud. One effective way to greatly minimize fraud occurring is to have proper segregation of duties. No individual should have excessive access or power to company processes without accountability and approvals. For example, if one of your employees is responsible for holding blank checks, as well as writing and approving them, that is a big risk for fraud.

As your auditors, we conduct risk assessments as a part of an audit engagement, but organizations can also do this process themselves during other times of the year. Internal risk assessments can help companies take a closer look at what key controls can be manipulated or which ones are not effective. Conducting tests as to whether a key control does detect or prevent fraud can also show you which controls need improvement.

Key controls are a huge factor in minimizing fraud. However, organizations can make an impact by promoting a strong and ethical culture throughout the organization. Having integrity and honesty as a part of the organization’s culture can deter an employee from committing fraud. Setting the tone from the top of the organization by demonstrating strong ethics and values, encouraging staff to act with integrity and enforcing company policies all help promote a work culture of honest and ethical behavior.

If you have any questions on effective internal controls, contact your Henry+Horne advisor.

Justin Miley

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