How Business Owners Facilitate Fraud in Their Startups
“..The words ‘internal controls’ give me an instant headache”. Mark explains to me as he sips his coffee. I ask him curiously “why?” I couldn’t understand how such simple words can cause agony to a small business owner. As an auditor for over a decade, I gained a pretty good understanding of what internal controls mean to a business.
You see, Mark runs a small business that connects farmers directly to customers. He conducts his business based on trust. He doesn’t see the need to keep checks and controls in place. He trusts that the casual employee he hires to collect farm produce will deliver to the customers and remit his revenue in entirety.
Let me digress a little bit in order to put things into perspective. Did you know that all fraud starts with the business owner? This happens when the owner is too trustful or too distracted growing the business leaving no time to check on how effectively the business is operating. The owner basically provides an environment conducive for fraud to occur.
Back to Mark who by now looks visibly stressed by the topic. He goes on to explain “Books and articles relating to internal controls are complex and full of jargon. I always think that internal controls are reserved for large organisations who can afford an expert to implement them. I attended a small business course but I slept through the internal controls topic. It was so boring. Furthermore, that is the auditors work. Isn’t it?”
What are internal controls
Perhaps I should first explain the concept of internal controls in a layman’s language (I don’t want you to get a headache like Mark). Internal controls are simply methods and procedures that you put in place in your business to:
- safeguard your assets;
- ensure that your records are accurate;
- ensure you comply with laws and regulations; and
- generally, prevent fraud and assist you to realise your business dreams.
How Internal Controls Prevent Fraud
Marks sentiments have been echoed by so many other small business owners. All business owners must pay attention to internal controls. When there is a conducive environment (provided by the owner) employees will commit fraud against the business, customers will shoplift, suppliers will overcharge, and so forth. Setting up internal controls will help reduce or eliminate some of these incidences.
A small business has limited resources and the owner must actively protect them through internal controls. By eliminating the opportunity and motivation for fraud and theft, you are able to discourage fraud. If that fails, you can take corrective action to minimise losses. But this can be very challenging for small businesses which don’t have that many employees, and they tend to wear multiple hats. In this section, I am going to demystify ‘internal controls’ and show you how you can incorporate them in your small business without paralysing it. Stay with me.