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.