Guarding Against Fraud
The Vital Role of Seamless Internal Communications
When occupational fraud occurs within an organization, it is not a surprise that the root cause of the fraud was due to deficient internal controls. However, what does “internal controls” mean to all parties involved at an organization? Accountants should know what “internal controls” are, but does this concept resonate with the personnel within the sales or operations departments? Perhaps not. This article discusses the importance of having all members of the organization involved in the internal control process.
Internal Communication and its Impact on Fraud Prevention
When occupational fraud occurs within an organization, it is not a surprise that the root cause of the fraud was due to deficient internal controls. However, what does “internal controls” mean to all parties involved at an organization? Accountants should know what “internal controls” are, but does this concept resonate with the personnel within the sales or operations departments? Perhaps not.
Nevertheless, for an organization to effectively prevent fraud internally, it is important for everyone within an organization to be on the same page about its internal controls policies. One way of reframing the idea of effective internal controls is calling it effective internal communication. In other words, an organization should build a robust infrastructure that ensures all relevant parties simply talk to one another on key data and information that they are involved with.
What could this entail? This could mean that the CEO simply tells the operations department to speak to the accounting department on a regular basis. Better yet, the two parties should document their communication with one another.
A recent experience in providing forensic consulting services for an organization highlighted the importance of internal communication. The accounting staff had received an invoice from an unknown vendor. After further investigation, it was clear to us that the organization lacked sufficient internal communication to prevent this issue from arising.
We discovered that the organization’s finance department was not involved in the process of engaging subcontracted vendors until payment was requested. The programs department had engaged with a subcontractor without telling the finance department about it. This resulted in the controller and his staff being unaware of subcontractor charges until they received an invoice. We recommended that going forward, the controller be involved in the review of proposals from subcontractors, which would allow his department to be aware of and prepare for payments; avoiding confusion and lost time.
“The program manager should talk to the controller on updates on new subcontractors being used for a recent project coming up. The two of them should document this discussion.” This statement sounds extremely simple for a program manager to understand. For the controller, this statement represents the foundation of effective internal controls and fraud prevention.
The COSO Internal Control Integrated Framework defines internal communication as “the means by which information is disseminated throughout the organization, flowing up, down, and across the entity.” This ensures that employees across all aspects of the organization receive consistent and accurate information, helps identify risks, promotes accountability, and supports informed decision-making. Effective internal communication is the backbone of a fraud-resistant organization; fostering transparency, collaboration, and a strong ethical culture.
To put it simply, without effective internal communication, the risk of fraud rises. Employees can be left in the dark about company policies they must adhere to, and management can be uninformed about crucial employee activities. This type of environment can cause confusion within the organization and create the opportunity for fraud to occur.
Effective internal communication not only serves as a robust defense against fraud, but also strengthens the overall cohesion and efficiency of an organization. When information flows smoothly across departments, employees are empowered with the knowledge they need to carry out their roles effectively. This interconnectedness fosters a sense of accountability and responsibility, as everyone understands their contribution to the broader organizational goals.
Consider a scenario where an organization’s sales department receives a new set of pricing guidelines to boost profit margins. Without proper communication channels, the sales team might not realize the implications of these changes on the accounting department’s processes. This lack of awareness could inadvertently lead to misreporting of revenues; creating an ideal environment for fraudulent activities to go unnoticed.
However, when a culture of open communication exists, departments collaborate to align their efforts. Sales would not only inform the accounting department about the new pricing structure but also work together to ensure that all transactions are accurately recorded and reported. Such coordination not only prevents fraud, but also enhances the organization’s credibility; both internally and externally.
Furthermore, effective internal communication entails more than just sporadic dialogues between departments. It involves the systematic dissemination of information, timely updates, and a proactive approach to addressing potential risks. Sales teams must not only be aware of pricing strategies, but also understand how those strategies align with the financial goals of the organization. Operations departments should be well-informed about budgetary constraints and resource allocations to ensure efficient project execution.
Moreover, effective internal communication acts as a deterrent to unethical behavior. When employees know that their actions and decisions are transparent and subject to scrutiny, they are less likely to engage in fraudulent activities. The knowledge that their interactions and decisions are being documented and shared across relevant departments creates a sense of responsibility that extends beyond individual roles.
To facilitate this crucial communication, organizations can implement a range of strategies. Regular cross-functional meetings can provide a platform for various departments to share updates, concerns, and insights. Additionally, the utilization of digital collaboration tools ensures that important information is accessible and traceable by relevant parties.
Leadership plays a pivotal role in promoting internal communication. By demonstrating a commitment to transparency and accountability, executives set a precedent for the entire organization. Encouraging open dialogue and providing opportunities for employees to voice their concerns or suggestions can help dismantle potential barriers to effective communication.
To sum things up, the concept of effective internal controls extends far beyond a technical understanding of financial processes. It is a fundamental aspect of an organization’s culture; promoting an environment where collaboration, transparency, and ethical behavior flourish. As organizations continue to navigate an increasingly complex business landscape, the value of robust internal communication cannot be overstated. By reimagining internal controls as a tapestry of communication, organizations can not only thwart fraud, but also cultivate a culture of trust and excellence.
All in all, a culture of communication is not just a shield against fraud; it is the foundation of a thriving and resilient organization.
Andre Castillo, MBA, CPA, ABV, CFE, is a Manager in the Financial Advisory Services group at CBIZ Marks Paneth. He provides services related to forensic accounting, litigation consulting, economic damages, internal control reviews, and fraud investigations for his clients. Prior to joining CBIZ Marks Paneth, Mr. Castillo started his career at KPMG LLP providing audit services to public companies in the sports and entertainment industry, and the consumer products industry. He holds a BA in Economics from Boston College and an MBA/MS in Accounting from Northeastern University.
Mr. Castillo can be contacted at (914) 524-9000 or by e-mail to andre.castillo@cbiz.com.
David Niknam, CFE, is a Semi-Senior Consultant at CBIZ’s New York City, NY location.
Mr. Niknam can be contacted at (212) 503-8800 or by e-mail to David.niknam@cbiz.com.
