A starting entrepreneur normally operates the business by himself, with perhaps some relatives helping out. But as the company grows, he slowly realizes the need to hire outsiders.
[related|post]When this happens, he has to divide responsibilities between himself and his employees, delegating tasks accordingly. At this point, he needs to establish an internal control system to avoid error, fraud, and oversight.
Such a system guards against losses resulting from employee lapses and abuses. The system is also meant to prevent fraud, control financial losses, and minimize errors and omissions.
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Two actions are needed to put in place an effective internal control system: safeguard physical records to reduce unauthorized access, and segregate duties to avoid conflicts of interest among the staff. The latter may involve limiting an employee\\\'s access to an area of business – cash transactions in particular.
Even when you have only one or two employees, this system of checks and balances can help you maintain control over your cash flow. While a P1-million loss is unlikely in a small business, a P10,000 loss may be too much.
Three conditions make fraud possible in any business:
The need for money: This is a common condition that tempts even the most honest of employees. They may become vulnerable and desperate when a usurer comes knocking on their door, when it’s already enrollment time, or a seriously ill parent racks up an astronomical hospital bill. Sometimes though, their backs are pushed to the wall because of an extravagant lifestyle, a drug addiction, or a gambling habit.