Ethics and basic internal control - Fraud awareness and segr...

Learning Outcomes

After reading this article, you will be able to explain the ethical expectations for those recording financial transactions, describe common types of workplace fraud, and recognise how key internal controls—such as segregation of duties—reduce fraud risk and error. You will also learn how to identify appropriate controls when recording or authorising transactions, and understand the importance of adhering to organisational policies for ethics and accountability.

ACCA Recording Financial Transactions (FA1) Syllabus

For ACCA Recording Financial Transactions (FA1), you are required to understand how ethical practices and internal controls protect the integrity of financial records. This article focuses on the following syllabus areas:

• The ethical duties of those involved in recording business transactions
• Risks and examples of workplace fraud in the accounting process
• The need for internal controls including segregation of duties
• Authorisation and approval procedures for transactions and payments
• Practical application of controls to prevent and detect fraud and error

Test Your Knowledge

Attempt these questions before reading this article. If you find some difficult or cannot remember the answers, remember to look more closely at that area during your revision.

1. What is the main purpose of segregation of duties in a bookkeeping environment?
   1. To speed up transaction processing
   2. To encourage teamwork
   3. To reduce opportunities for fraud and errors
   4. To minimise paperwork
2. Which of the following is considered an ethical duty of a bookkeeper?
   1. Maximising personal gain
   2. Ensuring records are accurate and honest
   3. Sharing customer information freely
   4. Authorising their own expense claims

3. Identify one control that can help detect fraudulent payments before money leaves a business account.

4. True or false? Segregation of duties always guarantees fraud cannot occur.

5. Briefly explain why management should review and approve all significant payments.

Introduction

Businesses rely on accurate, honest records and sound internal controls to protect their resources. If controls are weak, errors and fraud can undermine reliable reporting and lead to financial loss. As a bookkeeper or accounts clerk, you play a direct role in ensuring ethical conduct, detecting irregularities, and preventing fraud. Understanding your responsibilities and applying good internal controls like segregation of duties is essential for protecting the business—and for meeting ACCA exam requirements.

Key Term: ethics
Principles that guide individuals to act honestly and responsibly, especially when handling information or resources for an organisation.

ETHICS IN RECORDING FINANCIAL TRANSACTIONS

Every person involved in accounting must act honestly and with integrity. You must be truthful in recording and reporting all transactions, never falsify documents, and treat all financial information as confidential. If you identify suspicious activities or errors, you have a duty to report them following organisational procedures.

Key Term: fraud
The intentional deception to obtain an unauthorised benefit, often involving dishonest alteration of records, theft of assets, or misrepresentation.

Key Term: internal control
Procedures and policies set by an organisation to safeguard assets, ensure accurate records, and prevent or detect fraud and error.

FRAUD RISK IN THE ACCOUNTING PROCESS

Fraud can occur wherever there is opportunity, pressure, and lack of oversight. Typical examples in a financial environment include:

• Misappropriation of cash or cheques
• Falsifying invoices, expenses or petty cash claims
• Creating fictitious suppliers or employees to divert payments
• Removing or altering documents to conceal activity

Key Term: segregation of duties
The practice of dividing key tasks and responsibilities among different people so no one individual controls every stage of a transaction.

INTERNAL CONTROLS TO REDUCE FRAUD

Why Controls are Necessary

Controls reduce the risk of theft, error, and dishonesty in the accounting process. No system is completely foolproof, but effective controls make it harder for fraud or mistakes to go undetected.

Core controls include:

• Segregation of duties
• Mandatory authorisation of transactions
• Secure storage of cash, cheque books and sensitive data
• Regular reconciliations and supervisory reviews

Segregation of Duties in Practice

Segregation of duties means different people must be responsible for:

• Initiating a transaction (e.g., raising a purchase order)
• Approving it (management sign-off)
• Recording it in the accounts
• Making and reconciling payments

No single person should:

• Order goods, receive them, and approve payment
• Prepare, authorise, and post their own expense claims
• Control cash receipts and update bank records alone

When staffing is limited, at minimum, senior staff should regularly review activities and authorisations.

Authorisation and Review

Payments, journal entries, and major adjustments should not be processed without written authorisation from an approved person. Clear documentation, including supporting receipts and calculations, must always be checked prior to payment.

DETECTING FRAUD AND ERRORS

Regular checks such as reconciliations of cash balances, petty cash, and bank accounts help uncover unauthorised or incorrect transactions. Internal audit may also review the adequacy and operation of controls.

Serious breaches, attempted fraud, or ethical concerns should be reported according to the organisation’s policies (often via a whistleblower or escalation process). Prompt reporting protects both the business and the individual from ongoing issues.

Worked Example 1.1

Scenario:
A junior accounts assistant can request office supplies, approve the supplier invoice, update the records, and set up payments in the online system. Last month, a payment was made to a supplier that cannot be traced.

Answer:
This is a case where duties are not properly segregated. The employee can process a transaction from start to finish without oversight, increasing both error and fraud risk. Controls should be changed so one person orders, another authorises, and another processes payment, with regular reviews by management.

Worked Example 1.2

Scenario:
A payroll clerk enters overtime hours and also prepares payslips. The payroll is approved each month by a department manager. In one period, an error led to an employee being overpaid.

Answer:
Although there was manager approval, the same person recording and preparing payslips may have made the error. Regular payroll reconciliations and independent checks by HR or finance increase protection against such errors and potential manipulation.

Exam Warning

It is a common mistake to believe segregation of duties always prevents fraud. Controls reduce risk but cannot remove it entirely, especially if employees collude. For the exam, be clear that segregation of duties is an essential but not absolute safeguard.

Summary

Ethical behaviour and internal controls are essential to safeguard assets and ensure reliable records. Segregation of duties, authorisation of transactions, and regular reviews are key defences against fraud and error. All personnel must understand and follow ethical responsibilities and organisational policies when recording financial transactions.

Key Point Checklist

This article has covered the following key knowledge points:

• The importance of ethical conduct for accounting personnel
• Typical fraud risks faced in the bookkeeping environment
• The role of internal controls and segregation of duties in reducing risk
• Examples of how duties can be properly divided
• Need for authorisation and documentation before making payments
• Why regular reviews and reconciliations are essential

Key Terms and Concepts

• ethics
• fraud
• internal control
• segregation of duties