Internal Control – Segregation of Duties
One of the basic objectives of good fiscal management is internal control. This is key in both the for-profit and not-for-profit world, where the board of directors has a fiduciary responsibly to ensure that the organization is run with proper controls and checks in place.
The proper segregation of duties, though basic, is by far the most potent tool that leadership has to prevent fraud and mistakes, as it ensure that errors or irregularities are prevented or detected on a timely basis by employees in the normal course of business.
Segregation of duties provides two benefits:
- A deliberate fraud is more difficult because it requires collusion of two or more persons; and
- It is much more likely that innocent errors will be found.
At the most basic level, segregation of duties means that no single individual should have control over two or more phases of a transaction or operation. Management should assign responsibilities to ensure a crosscheck of duties.
If a single person can carry out and conceal errors and/or irregularities in the course of performing their day-to-day activities, they have generally been assigned or allowed access to incompatible duties or responsibilities. Some examples of incompatible duties include:
|An Employee who…||Should not…|
|Opens mail and endorses checks||Handle cash receipts|
|Prepares a document||Approve that same document|
|Handles cash receipts||Endorse checks;
Maintain petty cash funds;
Receive deposit slips or corrections from bank
|Prepares bank deposits||Receive deposit slips or corrections from bank;
Verify cash receipts;
Maintain petty cash fund;
Perform audit function
|Distributes payroll checks||Prepare payroll input|
Segregation of duties can be broadly classified it into the four categories:
- Recordkeeping; and
In an ideal system, different employees would perform each of these four major functions. In other words, no one person should have control of two or more of these responsibilities. The more negotiable an asset, the greater the need for proper segregation of duties. This is especially true when dealing with cash, checks, and inventories.
Authorization is the process of reviewing and approving transactions or operations.
Some examples include:
- Verifying cash collections and daily balancing reports;
- Approving purchase requisitions or purchase orders;
- Approving time sheets, payroll certifications, leave requests, and cumulative leave records; and
- Approving change orders, computer system design, or programming changes.
Custody is the process of having access to, or control over, any physical asset such as cash, checks, equipment, supplies, or materials.
Some examples are:
- Access to any funds through the collection of funds or processing of payments;
- Access to safes, lock boxes, file cabinets, or other places where money, checks or other assets are stored;
- Custodian of a petty cash fund;
- Receiving any goods or services;
- Maintaining inventories; and
- Handling or distributing paychecks, limited purchase checks, or credit cards.
Recordkeeping is the process of creating and maintaining records of revenues, expenditures, inventories, and personnel transactions. These may be manual records or records maintained in computer systems.
Some examples are:
- Preparing cash receipt back-ups or billings, purchase requisitions, payroll certifications, and leave records;
- Entering charges or posting payments to accounts receivable system; and
- Maintaining inventory records.
Reconciliation is verifying the processing or recording of transactions to ensure that all transactions are valid, properly authorized and properly recorded on a timely basis. This includes following up on any differences or discrepancies identified.
Some examples are:
- Comparing billing documents to billing summaries;
- Comparing funds collected to accounts receivable postings;
- Comparing collections to deposits;
- Performing surprise counts of funds;
- Comparing payroll certifications to payroll summaries;
- Performing physical inventory counts;
- Comparing inventory changes to amounts purchased and sold; and
- Reconciling departmental records of revenue, expenditures and payroll transactions to management reports