What is the purpose of internal controls in fraud prevention?

The purpose of internal controls in fraud prevention is primarily to mitigate fraud risk and protect company resources. Internal controls are systems or processes put in place by an organization to ensure the integrity of financial and accounting information, promote accountability and prevent fraud. They serve to safeguard assets, ensure accurate financial reporting, and encourage compliance with applicable laws and regulations, thereby reducing the opportunity for fraudulent activities.

By establishing these controls, organizations can identify potential fraud risks and act proactively to mitigate them. For instance, segregation of duties, regular audits, and authorization processes are all examples of effective internal controls that create a structured environment to deter fraudulent actions. The focus on protecting company resources highlights the role of internal controls as a defensive strategy against fraud, rather than merely enforcing compliance or boosting productivity, which are not their primary functions.