What is an example of a preventive control?

Segregation of duties is a fundamental principle in internal controls that aims to reduce the risk of fraud and errors. By dividing responsibilities among different individuals for related transactions, the organization creates a system of checks and balances. This means that one person does not have control over all aspects of any financial transaction, making it more difficult for an employee to commit fraud without detection. For example, in a financial process, one person might handle the authorization of transactions, another might process them, and a third might handle the reconciliation of accounts. Such separation minimizes the opportunity for illicit activities by ensuring that no single individual has the ability to execute and conceal a fraudulent transaction entirely.

The effectiveness of this preventive control lies in its proactive nature, as it intends to stop fraud from occurring in the first place rather than identifying or correcting issues after they happen. Other options, while effective in their own rights, either serve to detect issues after they have arisen or mitigate losses rather than preventing fraud outright.