Internal fraud can be damaging or even precipitate business failure

Internal control involves everything that controls risks to a business. Internal controls have existed from ancient times and in Hellenistic Egypt there was a dual administration, with one set of bureaucrats charged with collecting taxes and another with supervising them.

A business’s internal control objectives include:

  • The reliability of financial reporting.
  • Timely feedback on the achievement of operational or strategic goals.
  • Detecting and preventing fraud.
  • Protecting physical property (e.g. equipment) and intangibles (e.g. trademarks).
  • Compliance with laws, regulations and policies.

The five components of internal controls are:

  • Control environment – This sets the culture for the business and influences the employees internal control awareness.
  • Risk assessment – This is the identification, analysis, and management of risks.
  • Information systems – This is the identification, capture, and exchange of information in a timely manner.
  • Control activities – The policies and procedures that help ensure management directives are carried out.
  • Monitoring processes – Review the performance over time.

Although the CEO of a company has overall responsibility for designing and implementing effective internal controls, everyone in a company has responsibility for internal control to some extent.

Ineffective internal controls involving large scale fraud can destroy a successful business. The sad part is the fraud only needs to happen once. In 1993 Nick Leeson, a rogue trader at Baring Brothers merchant bank gambled away $1.4 billion. This unauthorised trading caused the collapse of the bank founded in 1762.


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