The best defense against fraud is to have a combination of preventative and detective internal controls.
Internal controls – processes that are put in place to help ensure the integrity of financial information, promote accountability, and prevent fraud.
- Preventative controls – work to stop improper transactions prior to being processed.
Examples of preventative controls include segregation of duties, security of assets, proper authorization, adequate documentation, policies and procedures, and training.
- Detective controls – look for both fraudulent and unintentionally improper transactions after the fact.
- Examples of detective controls include reconciliations, variance analyses, physical inventories, audits, and continuous monitoring through data analytics.
- Detective controls can also be preventative if potential wrongdoers know there are control processes in place.
By establishing an effective system of internal controls you can lower the risk of fraud. People at every level of the organization are responsible for the implementation and use of internal controls.
The following links listed to the left include common types of fraud and examples of internal controls a department should have in place to prevent and detect potential improper activity.