Preventing the slow boil
I am a big fan of internal controls and they are imperative to any organisation, big or small. They protect your organisation’s assets, including your most valuable asset, your employees.
Recent statistics point to ‘insiders’ being responsible for over half of reported frauds. They also report that 40% of frauds take-place over a 5-year period before detection.(Source:KPMG Fraud Barometer: April – September 2016).
In my experience with internal fraud it is not always malicious or planned at the outset. Often the individual involved had every intention of paying the funds back. From that point of view, it is often a trusted, longer term employee.
The weak internal controls are what allow the chain of events to start. A longer-term employee would be aware of where the weaknesses in internal controls are. They don’t abuse them due to the level of trust they share with the business. Then due to personal circumstances they may need a short-term loan. Rather than “bother” their boss they “borrow” this money. This initial amount is often small. When the internal controls are weak, it is easily concealed and it goes unnoticed.
The frog is now in the pot.
Then something else comes up for the employee and they need to borrow more; and on it goes.
The water in the pot starts to warm.
At some point they realise that their “borrowings” are now too much and they will never be able to pay it back.
Like the frog in the slowly boiling pot, they realise too late what has happened.
They feel guilty for having betrayed the business’ trust, so they continue to conceal it. They can in fact appear to become even more loyal to the company. They want to make sure there is no need to question the current weaknesses in internal controls.
The fraud is often found when they leave, or there is a change in operating procedure that exposes the issue. It then leaves everyone saying that they were such a well regarded and trusted employee.
The cause of all this isn’t an individual with bad motives. It is the fact the internal controls were lacking and allowed someone to get themselves into trouble.
It isn’t a question of how much you trust your employees.
It is about caring for them enough to ensure that if they have a problem, the temptation of “borrowing” money isn’t there. They would then be more likely to talk to you about it based on your relationship built on trust.
Having good internal controls is about preventing the slow boil.
Justin Hogg is an Accountant and CFO for Businesses, Founders and Entrepreneurs. He manages the numbers so that you don’t have to. He offers an initial complimentary 30 minutes session to see if he can help you to save business costs and reduce risk.
To arrange an initial, complimentary discussion, email me justin.hogg@rightsource.com.au or call 0414 896 696.