Generally, in the wholesale and distribution industry, there is a tendency to rely on a trusted employee and the example at the end of this article gives the consequences on relying on one trusted employee.
Here are the top 5 things every wholesale and distribution business owner should know:
1. What is an internal control system?
Internal control means the work of one person is reviewed or overseen by another employee or manager. For example, if the bank deposits are made by John, the bank reconciliation will be prepared by David so any discrepancy in deposits will be known to David when preparing the bank reconciliation
2. Why an internal control system is needed?
Internal controls are pre-established procedures allowing employees to know what duties they are assigned. They will also know that there is review and oversight procedures included in the system.
3. What are the benefits of an internal control?
The main benefit of an internal control system is to minimize the risk of fraud. Apart from this, when employees follow the pre-established procedures, there is efficiency.
4. What are the consequences of not having an internal control system in place?
Employees may follow their own procedures in executing the work which may result in fraud risk and operational in-efficiency.
5. Can a small business afford to have an internal control system? If so, how?
Yes, even a very small business can have an internal control system. The internal control procedures will differ according to the size of the operation. The business owner needs to consult experts in this area to establish a suitable internal control system for their operation.
FRAUD CASE STUDY
Below is a Case Study with one of our business clients:
Mr. A had a well established wholesale and distribution business and trusted one of his employees (Mr.S) for accounting, bill payment and all bank deposits, bank reconciliation, pay credit card companies, etc.
How did the employee manage to commit fraud?
Mr. A trusted Mr. S so much that he never reviewed either the bank statements or credit card statements. He also never saw the need for internal controls studies because he never thought Mr.S would ever commit fraud. As a result, Mr. S started using the mileage benefits from the credit card for his personal vacations. Mr. S created fictitious vendors and started making payments to them. Mr.S altered the amounts on the check after obtaining signature from Mr. A, etc.
How the fraud was detected:
Mr. A wanted to use the mileage benefits from his credit card so he called the credit card company and found out that the mileage benefits have already been used by his employee Mr.S and this brought the fraud to light.
What do we learn from the above example?
Even if you think fraud could never happen to you, it might be a good idea to have an internal controls study done in your business.
For more information about implementing an internal controls program in your business, contact LSL CPAs or call them at 714.672.0022.
By Suresh Narayanamoorthy, CPA, CFE
