The 501 S(c)ene

The latest view on not-for-profit accounting issues

Don’t give employees opportunity to commit fraud

fraud, segregation of duties, nonprofit, accountingThe term “segregation of duties” is used in the prevention of fraud within an organization. It involves separating duties among employees so that no single staff person is put in an advantageous position to exploit their control for self-gain. A large factor in how someone commits fraud and gets away with it is that they have too much control within the organization. When one person has too much control, their ability to conceal fraud is increased and the likelihood that someone would catch it becomes slim to none. Three duties that should be split among multiple employees are:

  • Having custody of assets
  • Having authorization or approval of related transactions affecting those assets
  • Having the ability to record or report the related transaction

When one employee is given all three of these duties, he or she an incredible opportunity to commit and conceal fraud. Smaller organizations may have difficulties with segregation of duties due to low staff numbers. Even with a two-person accounting department, proper segregation of duties can still be obtained. Segregation of duties should be evaluated on an ongoing basis and revisited when employee turnover occurs. Opportunity is the only corner of the fraud triangle that can be controlled by the employer.

Let’s focus on the process of cash disbursements and how even a small organization can properly segregate duties in this area. First, let’s look at an organization with just two employees.

Employee A:

  • Records disbursements into the general ledger
  • Mails checks
  • Writes checks
  • Reconciles bank statements
  • Authorizes invoices for payment

Employee B:

  • Signs checks

The key here is keeping the custody of assets out of the hands of the one who records and approves invoices. If it is possible, it can help to make a board member the sole check signor. If this is the case, then the cash disbursement duties can be spread out like the following.

Employee A:

  • Records disbursements into the general ledger
  • Writes checks
  • Reconciles bank statements

Employee B:

  • Mails checks
  • Approves invoices for payment

Employee C or Board Member:

  • Signs checks

Obviously, the more people you have involved in the process the better, but even with just two employees you can still achieve adequate segregation of duties. The goal is to keep one employee from having too much control and not giving them the ability to cover up their tracks if they were to commit an act of fraud.

Brandon Keeto