We’ve all heard the term “internal control.” Simply put, it involves anything that controls risks to a company, by ensuring reliable financial reporting, and compliance with laws, regulations and policies.

Implementing suitable internal controls in larger companies with a large management team is seldom an issue. For smaller companies with only a few staff it can be far more challenging, if not almost impossible.

So what can these companies do to reduce the opportunities for fraud and errors?

The first and most important step is to set the “tone and the top.” This is the ethical atmosphere created by a company’s leadership, be that an owners, a single management executive or group of executives, or both.

How do you set the tone at the top?

By creating, implementing and adhering to policies and procedures that are ethical and promote integrity. An owner(s) and/or management team that adheres to the company’s policies and procedures will set an example of the behaviour expected from employees. However, if an owner and/or management consistently makes an exception for themselves, they are setting an unethical tone at the top.

Most employees will mirror the behaviour and actions of their superiors. Thus, it is important to set the correct tone. Members of management or an owner(s) who are seen not providing receipts for reimbursement, failing to use timesheets, or failing to get approval for travel expenses, are highlighting opportunities for their employees to defraud the company.

Thus, it is important to emphasize the importance of ethics and controls at staff meetings and demonstrate that compliance is expected of everyone – owners, management and staff – at all times.

For more information on this topic, please contact your McCay Duff advisor.