Internal Control/Anti-Fraud Program Design for the Small Business

Internal Control/Anti-Fraud Program Design for the Small Business is a practical guide to protection for businesses NOT subject to the Sarbanes-Oxley Act. Written by an expert with three decades of forensic investigation experience, this book is geared specifically toward private, non-public small businesses and their unique needs in the realm of fraud protection. Covering all elements of an internal control structure applicable to the small business community, this guide provides a step-by-step roadmap for designing and implementing an effective, efficient internal control structure/anti-fraud program tailored to your business's particular needs. Case studies are used throughout to illustrate internal control weaknesses and the fraud that can result, and follow-up analysis describes the controls that would have reduced the probability of fraud had they been in place. You'll learn how to analyze your company's internal control issues, and implement a robust system for fraud prevention.

Guidance toward Sarbanes-Oxley compliance is readily available, but there is little information available for the many businesses not subject to the act —until now. This book is the step-by-step guide for instituting an internal control program tailored to your small business.

• Understand the five elements of internal control
• Avoid gaps in protection with relevant controls
• Design the ultimate anti-fraud program
• Implement internal control tailored to your needs

The majority of small business owners simply do not know the elements of or implementation process involved in internal control, and Sarbanes-Oxley guidelines don't necessarily scale down. Internal Control/Anti-Fraud Program Design for the Small Business helps you design and install the internal control/anti-fraud protection your business needs.

Preface: Maybe It’s Time We Get Back to the Basics xi

Acknowledgments xvii

PART I: THE ANTI‐FRAUD ENVIRONMENT: THE BLUEPRINTS, THE FOUNDATION, THE GROUND FLOOR

Chapter 1: The Architect’s Blueprint: Establishing the Framework 3

The Elements of Anti‐Fraud Program Design 3

Anti‐Fraud Environment 4

Fraud Risk Assessment 4

Control Activities 5

Information: Program Documentation 6

Communication: The Company Fraud Training Program 6

Monitoring and Routine Maintenance 7

Chapter 2: Foundational Policies: The Fraud Policy 9

Foundational Policies 10

The Fraud Policy: The Essential Elements of an Effective Fraud Policy 10

Case Presentation 17

Chapter 3: Foundational Policies: The Fraud Reporting Policy 19

The Essential Elements of an Effective Fraud Reporting Policy 20

Chapter 4: Foundational Policies: The Expense Reimbursement Policy 29

Case: “No Questions Asked” 29

Case: “It Will Never Be Missed” 30

Case: Larry the Chief Financial Offi cer 31

The Elements of an Effective Expense Reimbursement Policy 32

Appendix 4A: Expense Report Form 39

Appendix 4B: Supplemental Business Meal and Entertainment Charges Form 40

Chapter 5: The Ground Floor: The Fraud Risk Assessment Process 41

Ground Rules for Fraud Risk Assessment 42

An Example of Risk Assessment 43

Procedural Steps for Performing a Fraud Risk Assessment 44

Cash in Bank 48

Case: The Trail Is Gone 50

Case: Friends in Low Places 51

Asset Misappropriation 52

Corruption 53

Financial Statement Fraud 53

PART II: ANTI‐FRAUD CONTROL ACTIVITIES: RAISING THE WALLS

Chapter 6: Control Activities: The Absolutes 57

Critical Principles of Control Activity Design 57

Foundational Control Activities 59

Case: The Mail Drop in Las Vegas 64

Appendix 6A: Confl ict of Interest Form 67

Appendix 6B: New Vendor Establishment Form 68

Chapter 7: Control Activities: The Segregation of Duties Dilemma 69

But I Only Have Two Employees 69

Prevention versus Detection Controls 70

The Necessary Review Processes 72

Chapter 8: Control Activities: General Processes 75

Two Operational Questions 75

Common Control Activities 81

Case: The Cell Phone Reimbursement 91

Chapter 9: Control Activities: Specific Control Areas 95

Financial Statement Line Item Control Activities 95

PART III: COMPLETING THE ANTI‐FRAUD PROGRAM: THE CEILING, THE ROOF, AND ROUTINE MAINTENANCE

Chapter 10: The Ceiling: Documenting the Anti‐Fraud Program 103

Information 103

Documentation—Keeping It Simple 104

The Elements of High‐Quality Documentation 104

Chapter 11: The Ceiling: The Company Fraud Training Program 111

The Elements of Effective Communication 112

The Company Fraud Training Program 114

Chapter 12: The Roof: Monitoring and Routine Maintenance 119

Monitoring and Routine Maintenance Defi ned 120

The Monitoring and Routine Maintenance Structure 120

Chapter 13: The Sample Anti‐Fraud Program 129

Appendix 13A: Fraud Risk Assessment Framework Form 137

Appendix 13B: Control Activities Form 138

Appendix 13C: Documentation of Control Activities 139

Appendix 13D: Compliance Audit Programs and Related Compliance Audit Working Papers 154

Appendix A: The Fraud Policy 171

Appendix B: The Fraud Reporting Policy 175

Appendix C: The Expense Reimbursement Policy 179

Appendix D: Forms 185

About the Author 193

Index 195

STEVE DAWSON, CPA, CFE, is president and founder of Dawson Forensic Group, a firm devoted to the investigation of fraud and the education of the small business community in internal control/anti-fraud program design and implementation. For the past thirty years, he has performed forensic investigations and related forensic services for various businesses and agencies. He is a nationally recognized speaker in fraud detection, prevention, and internal control design methodologies. He is a graduate of Texas Tech University with a Bachelor's of Science degree in Accounting and holds a certified public accountant certificate in Texas as well as a certificate as a certified fraud examiner.

Internal Control/Anti-Fraud Program Design for the Small Business offers a much-needed and practical guide for designing and implementing an internal control and anti-fraud program that meets the needs of private, nonpublic small businesses that are not subject to the complex Sarbanes-Oxley Act. In it, author and forensic accounting expert Steve Dawson shows how to construct an effective and efficient anti-fraud program that relies on simple practicality.

Step by step, the author outlines the six elements of an effective anti-fraud program design—anti-fraud environment, fraud risk assessment, control activities, information, communication, and monitoring and routine maintenance. Dawson reveals how each of the six elements combine to create a solid framework built on reliable internal controls that are proven fraud deterrents.

The myriad illustrations and compelling cases presented in Internal Control/Anti- Fraud Program Design for the Small Business provide an analysis of the internal control weaknesses that can lead to fraudulent behavior. Dawson also explores the relevant controls that serve to reduce the probability of the occurrence of fraud. The controls are summarized according to the five elements of an internal control structure so that leaders can learn how to document their anti-fraud programs.

Dawson includes the information and strategies needed for companies to monitor and maintain their business for compliance with their anti-fraud program. He stresses the vital importance of assessing the effectiveness and efficiency of an anti-fraud program. All programs are fluid and need to be updated as changes in operational aspects of the business change. The proper monitoring of an established program will show where to direct routine maintenance.

Using this book as a guide, any small busi- ness can create a sound, well-thought-out anti-fraud program specifically tailored to its needs.

Internal Control/Anti-Fraud Program Design for the Small Business offers a much-needed and practical guide for designing and implementing an internal control and anti-fraud program that meets the needs of private, nonpublic small businesses that are not subject to the complex Sarbanes-Oxley Act. In it, author and forensic accounting expert Steve Dawson shows how to construct an effective and efficient anti-fraud program that relies on simple practicality.

Step by step, the author outlines the six elements of an effective anti-fraud program design—anti-fraud environment, fraud risk assessment, control activities, information, communication, and monitoring and routine maintenance. Dawson reveals how each of the six elements combine to create a solid framework built on reliable internal controls that are proven fraud deterrents.

The myriad illustrations and compelling cases presented in Internal Control/Anti-Fraud Program Design for the Small Business provide an analysis of the internal control weaknesses that can lead to fraudulent behavior. Dawson also explores the relevant controls that serve to reduce the probability of the occurrence of fraud. The controls are summarized according to the five elements of an internal control structure so that leaders can learn how to document their anti-fraud programs.

Dawson includes the information and strategies needed for companies to monitor and maintain their business for compliance with their anti-fraud program. He stresses the vital importance of assessing the effectiveness and efficiency of an anti-fraud program. All programs are fluid and need to be updated as changes in operational aspects of the business change. The proper monitoring of an established program will show where to direct routine maintenance.

Using this book as a guide, any small business can create a sound, well-thought-out anti-fraud program specifically tailored to its needs.