Is internal control really necessary to combat fraud?

According to a study conducted with the independent polling institute Selvitys9 out of 10 people claim to have an internal process for combating fraud. But what about internal corporate fraud? Theft of assets, falsification of financial data, abuse of power or embezzlement - the forms of internal fraud are varied and can have serious repercussions. Faced with these risks, internal control is often a key solution. But is its effectiveness in combating fraud really proven?

Understanding the role of internal control in a company 

Internal control is a set of processes, policies and practices designed to ensure the smooth running of a company. It is based on three objectives main :

1. Guaranteeing reliability of financial information and operational
2. Ensuring respect for the law and the rules of procedure
3. Preserving assets of the company against loss or misappropriation

In practical terms, internal control involves putting in place mechanisms to supervise, validate and continuously assess activities in order to reduce the risk of fraud. For example, internal control may include :

• There segregation of duties to prevent one person having total control over a transaction.
• From regular audits to detect anomalies.
• There policy implementation compliance. 

To find out more about the 5 stages of successful internal control : corporate internal control or how to combat fraud 

On the other hand, some frauds continue to occur despite well-established internal control systems. This raises questions about the limits of these mechanisms! 

Why is internal control necessary in the fight against fraud?

1. Prevent opportunities for fraud

One of the main causes of document fraud is the existence of opportunities. 

Fraudsters exploit loopholes in internal processes. What is a flaw? Inadequate supervision or overly broad authorisations. This is where internal control comes into play act as a deterrent by reducing these opportunities.

For example, a company that puts in place a rigorous validation process for each payment limits the chances of an employee misappropriating funds. Similarly, increased monitoring of access to sensitive data reduces the risk of information being falsified or stolen.

2. Rapid detection of anomalies

Despite best prevention practices, some frauds do occur. In these cases, the the ability to detect an anomaly quickly is crucial to limit the damage. 

Internal control, thanks to regular audits and automated reporting systemsThis enables irregularities to be spotted before they get out of hand.

Let's take the example of a company that monitors variances between forecast budgets and actual expenditure. An in-depth analysis of significant discrepancies may reveal fraud attempts, such as fictitious invoices or unauthorised payments.

3. Strengthening the culture of ethics

Effective internal control also helps to promote culture of integrity within the company. The existence of clear policies and a code of ethics shows that the company takes the fight against dishonest behaviour seriously.

Read on: how do you sell an anti-fraud project internally? 

The limits of internal control in the face of fraud

1. Complex internal fraud

Internal control systems can be circumvented by malicious employees. Generally speaking, these people occupy positions of responsibility and know the flaws in the processes. 

Internal fraud can go unnoticed for months at a timeThis can take years if the control mechanisms are inadequate.

For example, fraud by Jérôme Kerviela former Société Générale trader, was concealed by accounting manipulations. These various operations led to a loss of €4.9 billion in 2008, one of the biggest frauds in banking history.

2. The cost of control

The implementation and maintenance of an internal control system can be expensive. They involve investment in specialised software, employee training, and sometimes the hiring of additional staff dedicated to control. 

For small businesses, these costs can be an obstacle, although they remain essential.

Towards a stronger fight against fraud

To maximise the effectiveness of internal control in the fight against fraud, it is essential to go beyond standardised measures. Here are some complementary strategies:

• Training and raising employee awareness Internal fraud is often facilitated by errors or negligence. Regular training in good compliance practices and recognition of fraud signals can reduce these risks.
• Encouraging internal reporting : Setting up anonymous channels for reporting suspicious behaviour enables fraud attempts to be identified at an early stage.
• Integrating tools and software Artificial intelligence and machine learning can analyse large quantities of data. They can detect unusual or suspicious patterns and offer fraud opportunities.

Want to find out more about anti-fraud software? Don't hesitate to contact our experts, who will be delighted to help you.