Fraud, Internal Controls, and Cash

This reading provides an overview of fraud risk and internal control systems to mitigate them in the corporate world. Barely a day goes by when the news does not include a story about embezzelement or other fraud at companies throughout the US. Part of the role of the accounting system is to help prevent and detect fraud. This information is extremely important for non-accountants to understand as well. If your company does not have strong internal controls, fraud could impact your bottom line or even get you involved in an investigation into criminal behavior.

Why It Matters

One of Jennifer's fondest memories was visiting her grandparents' small country store when she was a child. She was impressed by how happy the customers seemed to be in the welcoming environment. While attending college, she decided that the college community needed a coffee/pastry shop where students and the local citizens could congregate, spend time together, and enjoy a coffee or other beverage, along with a pastry that Jennifer would buy from a local bakery. In a sense, she wanted to replicate the environment that people found in her grandparents' store.

After graduation, while she was in the planning stage, she asked her former accounting professor for advice on planning and operating a business since she had heard that the attrition rate for new businesses is quite high. The professor told her that one of the most important factors was the selection, hiring, and treatment of happy and productive personnel. The professor further stated that, with the right personnel, many problems that companies might face, such as fraud, theft, and the violation of the organization's internal control policies and principles, can be lessened.

To emphasize her point, the professor stated a statistic from the National Restaurant Association's 2016 Restaurant Operations Report that restaurant staff were responsible for an estimated 75% of inventory theft. This statistic led to the professor's final gem of wisdom for Jennifer: hire the right people, create a pleasant work environment, and also create an environment that does not tempt your personnel to consider fraudulent or felonious activities.

Source: OpenStax, https://openstax.org/books/principles-financial-accounting/pages/8-why-it-matters
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