Perhaps one of the most crucial controls an entity can have is the segregation of duties. Basically, this requires multiple people within a process to complete an objective so that no one is in charge of the process from start to finish. As you begin to think of the different processes within your entity and where there may be a lack of segregation, remember that no one individual should perform two or more of the following functions:
- Authorization or approval
- Recording or reporting
Duties should be segregated so that the work of one person is being reviewed and approved by the work of another person. For example, the person who has access to cash should not be the same person who reconciles cash. This would be a conflict with the functions of custody and recording. A few more common examples where a lack of segregation is found include:
- The person responsible for the receipt of cash/checks should not be the same person who records the cash transactions in the accounting system.
- The person responsible for maintaining the vendor master file should not be the same person who authorizes a change to the vendor master file.
- The person responsible for signing and approving checks should not be the same person who prints checks.
Why is this important? Is it really necessary to spend the time and effort to determine if there should be additional segregation in your organization? Simply put, yes. The fraud triangle consists of three elements:
While it is difficult to manage rationalization and pressure as each employee is different, segregation of duties is the single best control to mitigate the opportunity someone could have to commit fraud. There have been numerous cases of fraud across all industries, regardless of size, that were the direct result of not having proper segregation of duties. This lack of segregation gave someone the opportunity to not only perpetrate fraud, but to conceal it. Oftentimes, the reasons for not having proper segregation include access to limited resources or uncertainty in how to implement it within the organization. However, the consequences of giving someone the opportunity to commit fraud can be far more dire than the process of figuring out what is necessary. That is why it is vital to be continually aware of the controls within your organization and be on the lookout for areas of improvement and better segregate the duties of employees.
Feel free to contact your Henry+Horne tax adviser with any questions.
Andrew R. Gill, CPA