The admin officer in your accounting department deposits the daily cash register at the bank at the end of each day. However, one month your lead accountant alerts you to a recurring discrepancy between the monthly cash income at the office and the cash deposited at the bank. A visit to the bank manager reveals daily ATM footage of your admin officer depositing the cash income at the ATM and also taking some of the funds and putting it into her pocket.

Or, you hire a manager to open a branch of your company in San Diego, California. He receives approval to rent a company car for several months whilst setting up the new office and assembling his team. However, he decides to use his own car and creates a fake monthly car rental invoice to charge the company for money he then deposits in his personal bank account tax free.

It’s common for young companies to neglect tight internal controls to prevent financial fraud by staff

Unfortunately, these are case studies where two early stage companies failed to implement appropriate internal controls. It’s common for young companies to neglect tight internal controls to prevent financial fraud by staff. This is risky business. If things go awry, the business owner is left feeling betrayed by his employees and endures many sleepless nights thinking about the missed signs that in hindsight seem obvious.

I’ve discussed many financial topics in these articles, including knowing your numbers, hiring the right finance team around you, reporting, and raising capital. Over the next two articles, we’ll be discussing a different, and yet critical role your accountant, controller, or CFO plays inside your business. Apart from having control over your numbers, you must also have control and oversight in your internal processes and cash ow both inside and outside your company.


As your company grows, it becomes more susceptible to fraudulent activity due to higher turnover, increasing number of staff, and geographic dispersion.

The Managing Director of a company decides she wants to launch her own endeavor. Instead of leaving her current position first, she buys furniture for her new office in London and alters the invoices such that it looks as though her current employer is buying them for a branch office in Manchester. She buys over GBP50,000 worth of office furniture and equipment in one month. Here is where it gets interesting. When the company accountant asks her about these above-budget expenses she has been unilaterally approving, she tries to convince him to collude with her.

He refuses and contacts the business owner. The managing director is let go immediately and is requested to reimburse the company for the expenses she has personally incurred. It’s important to note that the amounts she was unilaterally approving were within her right according to the accounting policy, a clear oversight by the finance team. The limit that one person could singly approve was immediately reduced to GBP3,000, with any amount above this limit needing a minimum of 2 authorised signatories.

It’s usually the case that the higher up an individual in the hierarchy of an organisation, the more damage can be inflicted. Unfortunately, no matter how strong the internal controls are, they can be bypassed or overridden for a significant amount of time when there is collusion by two or more staff members. Ultimately, though, the scheme always gets discovered.


If you receive an audit, internal controls are one of the main areas auditors examine. They will look for any unusual or unexpected relationships between staff and external stakeholders, examine general journal entries for non- standard transactions, evaluate policies and revenue recognition practices, and evaluate the rationale for significant unusual transactions.

Your management team, financial lieutenant, and select employees will be asked to go through something called a SAS99 interview (in the US), which is a questionnaire intended to detect fraud or misappropriation of funds inside your company. I’ve chosen some select questions from the questionnaires intended for the management team, the lead accountant, and an employee. Consider each question in terms of how it might relate to your business. The first set of questions comes from the management questionnaire:

  • How could someone steal from the organisation without getting caught?
  • Where is it most likely you would experience fraud?
  • Are you aware of any allegations of fraud (e.g., received in communications from employees, former employees, analysts, regulators, or others)?
  • Are you aware of any instances of management override of controls and what was the nature and circumstances of such overrides?
  • Have you ever noticed any unauthorised cheques written to an unfamiliar/unauthorised vendor?
  • Have you ever noticed a fictitious employee on payroll records?
  • How do you make it clear to employees that unethical or dishonest behaviour will not be tolerated?


These second set of questions are directed at the accounting function of the company:

  • Does the owner/manager run personal expenses through the business?
  • Have you ever been asked to record any journal entries that seemed unusual or lacked support?
  • Have you ever been asked to make false entries in the accounting entries?
  • Are there any changes in procedures or improvements in controls that could be easily made, but management has chosen not to?


Lastly, the employees are asked a series of questions to provide a 360-degree view of the company:

  • Do you know anyone who is upset with the organisation?
  • Do you know of any employees who are under pressure to make ends meet financially?
  • Have you noticed any unusual behavior or lifestyle changes of management or any other employees?
  • If employees are suspicious that something unethical may be taking place in the business, would they feel free to report it? Are they aware of who it should be reported to?
  • Have you ever been asked to ignore or override a policy or procedure that is part of your job? Who asked you?

In each story example in this article, many of the above questions would be answered with a resounding yes.

Dan Kennedy wrote an interesting article in his April marketing newsletter stating he’s not onboard with this “on – not in” stuff that Michael Gerber espouses. He said, “Getting away from the gory details is a seductive idea, but this is at odds with the way super-successful entrepreneurs actually do things. The desire to be divorced from the details can be dangerous. I used management by walking around. A lot. I could smell reality concealed by computer print-outs and others’ so- called information. I was not easily fooled. Fools rush out and away from the grinding gear aspects of their businesses, while the leaders of every pack rush in. This from Jerry Seinfeld: “The reason the show was successful is that I personally micro-managed it. Every word, every line, Every take. Every edit. Every casting. That’s my way of life.” Dan wants us to work in and on the business, macro and micro.

Engage with the details, answer the above questions with 100% confidence and catch any improprieties before they occur in your business.

In next month’s article, we’ll examine the steps to take when you uncover fraud.