by Lizl Pretorius, CPA
Segregation of duties involves dividing the responsibilities for a sequence of tasks to prevent embezzlement, or limit errors to protect your business finances and assets.
Stated differently, it is a simple set of internal controls that reduces or prevents accidental or intentional fraud in relation to areas with high risk, for example cash and inventory. These controls are usually a division of responsibilities and processes within the business ensuring that no single role or department as unchecked power. Therefore, helping to eliminate errors or preventing theft.
Key duties that are usually segregated
1. Custody of assets
The team member who handles the asset, for example, cash or stock, should not also record cash on hand and deposit the cash at the bank, or authorise orders received for which stock needs to be picked from the shelves.
2. Approvals and verification
The team member approving or verifying transactions should not record transactions. For example, the person preparing the creditors reconciliation and attaching the creditors statement for review, should not be the person verifying that the totals match and then making the payment to the creditor.
3. Recording and reporting
The team member recording and reporting transactions should not be the one reviewing the overall soundness of the financial reports.
Generally, small business owners don’t have a large staff compliment and may find it difficult to segregate duties amongst employees. However, we suggest you assess your business risk and still implement steps to reduce errors, fraud or other unwanted outcomes.
How can you implement segregation of duties?
Implementing segregation of duties doesn’t need to be complicated. These steps will guide you through the process.
1. Identify business-critical transactions and processes
Draw a simple chart of your business-critical processes or transactions from beginning to end
Identify areas where your business is most vulnerable, e.g. payment approvals, cash handling, and financial reporting
Consider which staff currently have access to information that they do not need access to
2. Create a segregation of duties template
Note the role of the team member and their responsibility in the process or transaction
Identify which duties will need to be segregated
Keep the focus on key items that present a risk to the business
3. Divide responsibility
Assign responsibilities amongst the team to ensure no single role has all the power
For example, the role handling cash should not be the same person depositing the cash into the bank account
Another example, the role that picks the inventory should not check and release the goods for delivery
It may be convenient to give a senior employee all the necessary authorisations, however, consider how much power is too much power? Only you can decide what is right for your business.
4. Controls
Wherever possible implement additional controls and safeguards to address the risk For example, accounting and stock management software have features that allow you to limit permissions based on job roles which can save you time and streamline the process
Decide which levels of access are appropriate according to the functions performed by staff and set up related software access
Limiting the ability to change sensitive information would assist in preventing fraud and data manipulation. Review staff access and implement or restrict levels of access based on individual roles
Keep the message to staff positive. These controls –
protect them and reduce their exposure to the actions of others
this is best practice in all industries
means consistent treatment of processes across the team
5. Regular reviews
Regularly review the process and compliance with the segregation of duties
As your business grows and evolves, these may need to be adjusted
Should you find discrepancies in transactions or flouting of controls, take action! The longer these continue the greater the potential negative impact on your business. It’s better to ruffle a few feathers with an early investigation, than wait for a catastrophic event that threatens your livelihood
Oversight and investigations signal to your team that you take checks and balances seriously
Top tips for common business scenarios
There are common scenarios that small to medium businesses face and here are my tips for managing them:
Employees taking leave
Taking leave promotes emotional and physical wellbeing and should be encouraged. Ensure that more than one person can fill the role.
This reduces the likelihood that a single employee is in control of a process, or able to circumvent systems and transactions and go unnoticed for long periods of time
Key expenses
Large payments, ATO debt and wages should be reviewed, approved and if possible paid by the owner.
Attach the ATO Statement of Account to the payment made which verifies that the payment was received by the ATO
Make use of debtors and creditors statements and reconciliations to ensure that the amounts recorded and showing as due match the client or supplier records
Investigate any discrepancies
Bank details
Any change in bank details should be made by the owner. This will reduce the risk of fictitious suppliers and employees being set up and paid. Best practice:
Follow up any discrepancies between your records and the customer or supplier documents
Passwords
Passwords should not be shared among employees nor be written down
Do not use the same passwords for various applications
Health check
Regularly perform a general system health check to identify areas within your internal control system and internal processes that are vulnerable.
This supports the integrity of your software applications and financial reports
Ensure software security updates are implemented as they are rolled out by the developer
How can ABA. Advice Beyond Accounting help you with segregation of duties?
The team at ABA. Advice Beyond Accounting is passionate about helping business owners achieve their goals. Our experienced accountants, bookkeepers, and business advisors are committed to helping you improve your business processes as well as taking care of your accounting and tax compliance.
Unsure where to start? We offer various service packages with regular meetings and ongoing coaching that will help you take your business to the next level. We can help you identify processes and financial transactions where your business may be vulnerable. As well as suggest control and approval points that you can implement in your accounting software.
If you’d like to discuss how we can help you improve your finance process to ensure segregation of duties are implemented and working effectively, fill in the contact form and we’ll be in touch.