29 Sep 2022


How to Prevent Internal Fraud in Your Business

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Academic level: University

Paper type: Essay (Any Type)

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An internal fraud takes place in an organization when an employee dishonestly makes false exemplifications or wrongfully fails to make known information, or misuses a position of trust for individual gain or causes forfeiture to others. The acts of internal fraud range from the inflation of expenses, compromising of the payroll or customer data or the issuing of payment checks to fictitious companies as in the case of Wendy. For most organizations, as they employ their staff, they believe they are trustworthy and honest to carry out any duties assigned to them. However, for the small percentage of staff that defrauds the firm, they pose a lot of danger for they can cause a company to experience financial losses and immeasurable damage to its image (Gillet et al., 2010)

Wendy involved herself in internal fraud following her setting up of dummy companies and issuing checks for fictitious purchases. It is the responsibility of the firm to ensure that it has in place a proper mechanism that can prevent the occurrence of such unwanted activities. For companies that do not have enough personnel that will allow them to segregate duties, they should do away with signature stamps and automatic check-signing machines as a means of signing checks. Such means are mainly used in firms that have numerous checks that need manual signing. If this is the case, control access procedures should be put in place in relation to the signature stamp. The stamp should be locked in the approved signer’s desk, and only authorized persons should have a key to access the stamp. In case a check signing machine is used in the firm, the owner of the company should ensure that they check its log frequently for it can keep a record of the number of processed check. This will help in the prevention of signing checks that have not been authorized by the firm.

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The selected general manager or owner of the company should be the one who receives the unopened bank statements and is the first person to go through them. This can be through co-coordinating with the bank to ensure they are delivered at the manager’s or owner’s home address so as to prevent any inception at the office. For any good accountant, they need to be aware of what a cancelled check without any transaction in the books will mean when the statements arrive. In the case of Wendy, she might have had access to the bank statements and also prepared the monthly reconciliations. When the original cancelled checks that were made payable to her fictitious companies came, she would destroy them. She would even alter the books so that they can coincide with then bank statements. This would make the cash seem like it was paid for actual services yet that was not the case. Even though this control might not help in preventing of check forging activities by an employee, it helps in timely detection of the theft. The employees also will develop cold feet to undertake any such activities for they know the bank statements are being watched over.

In the case of Wendy’s organization, one can conclude that they are using an off-the-shelf accounting software package. This accounting software is usually cost-effective thus it is used by most organizations to record their transactions (Olsen and Saetre, 2007). However, they can easily become manipulated by an ill-behaved employee such as Wendy. Using this software, the employee can print checks and delete any record of such transactions. Wendy can list her fictitious company and enter the payable amount to the company and print the check. After the software has printed the check, asks if the check is printed correctly of which the user can say it has not thus deleted the record of the particular transaction. The company should use a custom accounting software. According to Olsen and Saetre (2007), this will give them an opportunity to design software depending on their needs and any changes to it can be made easily in case it needs an upgrade. As in the case of printing checks, the company can customize it in such a manner that it asks for an administrator’s password before proceeding. Even though it has a very high initial cost, its long-term goals are positive.

The separation of duties is a basic exercise that can be used in averting accounting fraud. There should be clear separations between the individual who takes delivery of goods, process's invoices and payments and one who signs the checks. There should also be a division between one who gets bank statements and the one who reconciles them (Rae and Subramaniam, 2008). The company should also put a threshold on payment. This will see the manager should approve a payment that amounts to a certain amount such as $100 and it is he/she who signs off the check personally.

It is evident that the lack of proper controls within an organization can simplify the occurrence of internal fraud. They should be present for they act as the first line of defense in stopping fraudsters from emerging within an organization. These can include the segregation of duties and sue custom made accounting software.


Gillet, R.; Hubner, G. & Plunus, S. (2010). Operations risk and reputation in the financial industry. Journal of Banking and Finance, 34(1), 224-235.

Olsen, K. A. & Saetre, P. (2007). ERP for SMEs-is proprietary software an alternative? Business Process Management Journal, 13 (3), 379-389.

Rae, K. & Subramanian, N. (2008). Quality of internal control procedures: Antecedents and moderating effect on organizational justice and employee fraud. Managerial Auditing Journal, 23(2), 104-124.

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StudyBounty. (2023, September 14). How to Prevent Internal Fraud in Your Business.


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