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Defending Your Business in Extraordinary Times

15/04/2020


Unprecedented changes have occurred in how business is carried out. Staff have been redeployed to work remotely, staffing levels severely reduced, cash flow has been interrupted. New methods and shortcuts are being taken to process sales or handle payments. Online banking, e-transfers, new data sharing methods have quickly been expanded and IT resources are being deployed in ways we never thought much about before and stretched. In short, how we did business last week is very different to how we are doing business this week, and next.

Such vast and hasty changes can seriously degrade a company’s internal controls. Controls that prevent errors, fraud, and abuse may become compromised as the processes and the people change quickly.

It may take some time to redesign business safety nets to fit the new conditions, but there are some practical steps that can be taken now:

  1. Take a breath. Before concluding or authorizing transactions or making payments, don’t rush, take a moment, check the details, confirm with the party(ies) involved, and if in doubt, wait for further clarification.
  2. Not self isolation this time, but remember that one of the best business controls is preventing one person from initiating, approving, and recording a transaction without oversight from another person. Check to make sure that with staffing changes that key areas of your business still have effective segregation of responsibilities. At a base level, segregating conducting transactions from accounting for them is a good start. Please see the segregation of duties examples, at the end of this article.
  3. Do not sign blank cheques, share passwords, or allow wider team access to electronic banking. Electronic banking should be limited to very few people, and monitored by the Owner or Executive daily.
  4. Ensure your networks have sufficient security in place to ward off internal misuse or external attacks.
  5. Review payroll carefully. Look for inflated wages or hours, previously laid-off workers, duplicate payroll accounts for a single employee, duplicate direct deposit bank accounts and unusual payments such as backpay, vacation, or advances. Monitor overtime claims and expense reports for validity.
  6. A regular financial reporting package should be prepared and provided to the Executive / Board for review, weekly. This package should be designed in a top-down, risk-based manner to give decision makers what they really need to know, and include budget-to-actual comparatives in all major revenue and expense categories.
  7. Limit or remove access to corporate credit cards or purchasing cards. Review statements carefully. The person incurring the expenses should not be the same person to review them for operational benefit and or code them for accounting purposes.
  8. Reconcile your bank statements weekly, and investigate any discrepancies noted.
  9. Examine carefully all invoices received under contractual terms, and reconcile them to the terms and conditions of the contract to identify any potential overcharges or unauthorized fees.
  10. Inventory all non-cash assets, such as equipment, vehicles, technology and office assets. Track their locations periodically.
  11. Protect patents, unique technologies, customer lists and other entrepreneurial matters that are of significant value to your business.
  12. Continue to monitor key business processes, such as depositing money, making payments, inventory movement and accounting adjustments.
  13. Pay attention to your employees. Look for signs of stress or unusual behaviours. Good people are capable of unethical actions when they feel pushed to the edge. Financial pressures, isolation pressures and uncertainty can motivate employees to seek an opportunity for financial gain at your expense.
  14. Keep a positive attitude with employees, customers and business partners.
  15. Maintain active communication with your teams, but refrain from disclosing sensitive or confidential information to everyone. Managing communications will be key to weathering the storm.

Don’t let these extraordinary times impact your vigilance but recognize there will be increased personal pressures to commit fraud, increased opportunity to commit fraud due to the changes in internal controls and new ways for otherwise good people to rationalize bad acts. Pressures, opportunity, rationalization: when these three exist together, fraud may not be far away.

Segregation of Duties

The following figures summarize how you can segregate duties with two, three or four people.

Two People 

Responsibilities for Accountant or Other Financial Personnel

  • Record pledges
  • Mail cheques
  • Write cheques
  • Reconcile bank statements
  • Record credits / debits
  • Approve payroll
  • Disburse petty cash
  • Authorize purchase orders
  • Authorize cheque requests
  • Authorize invoices for payment

Responsibilities for Executive Director

  • Receive and open bank statements
  • Sign cheques
  • Make deposits
  • Manage interbank transfers
  • Distribute paycheques
  • Review petty cash
  • Review bank reconciliations
  • Approve vendor invoices
  • Perform analytical procedures
  • Sign important contracts
  • Make compensation adjustments
  • Discuss matters with BOD or audit committee

Three People

Accounting Staff

  • Record pledges
  • Write cheques
  • Reconcile bank statements
  • Record debit / credits
  • Reconcile petty cash
  • Distribute payroll

Executive Director

  • Sign important contracts
  • Make compensation adjustments
  • Discuss matters with Board of Directors or audit committee
  • Sign cheques
  • Complete deposit slips
  • Perform interbank transfers
  • Perform analytical procedures
  • Review bank reconciliation

Accountant or Other Financial Personnel

  • Approve payroll
  • Process vendor invoices
  • Mail cheques
  • Perform analytical procedures
  • Approve invoices for payment
  • Disburse petty cash
  • Open mail and log cash
  • Receive bank statements

Four People

Accounting Staff

  • Record pledges
  • Write cheques
  • Reconcile bank statements
  • Record credit / debits
  • Reconcile petty cash

Executive Director

  • Sign important contracts
  • Make compensation adjustments
  • Discuss matters with Board of Directors or audit committee
  • Sign cheques
  • Perform analytical procedures

Accountant / other staff

  • Distribute payroll
  • Open mail and log cash
  • Disburse petty cash
  • Mail cheques
  • Review bank reconciliation

Accountant / other

  • Approve vendor invoices
  • Perform interbank transfers
  • Approve payroll
  • Complete deposit slips

In addition, non-accounting personnel can be trained to perform some of the less technical duties. Board members can be used to further segregate duties.

For more information on protecting your organization from internal fraud, contact:

Derek Malcolm, CPA, CA, CA∙IFA
Partner, Forensics and Litigation Support
403.537.7666
[email protected]

Lisa Majeau Gordon, FCPA, FCA, CA∙IFA, CFE, CFF, CICA
National Leader, Forensics and Litigation Support
780.451.4406
[email protected]


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