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How to Properly Segregate Duties in a Small Office

“If someone were to commit fraud, how would they pull it off?”

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Forensic

This is a question auditors frequently use when discussing internal controls with a client. I am often surprised at how often the answer to that question is: “I’ve never thought about it before.”

In 2013, the Committee of Sponsoring Organizations (COSO) of the Treadway Commission, as a part of its wider initiative to combat corporate fraud, released its updated report entitled Internal Control – Integrated Framework. This was a revision of the original four-volume report released in 1992. This internal control framework contained five elements: Control Environment, Risk Assessment, Information/Communication, Monitoring, and Control Activities. This article will focus on control activities, specifically, segregation of duties within a small office setting.

Proper segregation of duties dictates that duties be separated so that no single person is authorizing, recording and maintaining custody of a transaction. I often hear from clients that segregation of duties is just not possible. However, even in the smallest office settings, there are ways to help mitigate the possibility of fraud. All small organizations need more involvement in the management of day-to-day activities of the organization. There is often a strong tendency to leave the “paper work” to others, but this is the key to good internal controls in a small organizational environment.

The COSO guidelines indicate that the control activities should have:

  1. Policies establishing what should be done; and
  2. Procedures to implement those policies.

Policies and procedures should cover all routine functions, as well as non-routine functions. How are non-routine transactions handled? How have employees been told to communicate fraud if it is discovered? All policies and procedures should be documented in writing. This establishes clear communication of management’s intentions and enables the organization to carry on when someone quits or is terminated.

Once policies and procedures have been established in written format, it is imperative that management periodically review the procedures to determine they have not been inadvertently or intentionally changed.

Below are some ideas of how to properly segregate duties within a two-person, three-person and four-person office.

Two-Person Office

Bookkeeper

CEO or Owner/Manager

  • Record accounts receivable entries
  • Mail checks/authorize electronic payments
  • Write checks
  • Record general ledger entries
  • Reconcile bank statements
  • Record credits/debits in accounting records
  • Approve payroll
  • Receive cash
  • Disburse petty cash
  • Authorize purchase orders
  • Authorize check requests
  • Authorize invoices for payment
  • Approve and sign checks
  • Sign employee contracts
  • Complete deposit slips
  • Perform interbank transfers
  • Distribute payroll
  • Reconcile petty cash
  • Approve employee time sheets
  • Process and approve vendor invoices
  • Review bank reconciliations
  • Prepare/approve annual budget
  • Review monthly financial statements

 

Three-Person Office

Bookkeeper

Office Manager

CEO or Owner/Manager

  • Record accounts receivable entries
  • Reconcile petty cash
  • Write checks
  • Record general ledger entries
  • Reconcile bank statements
  • Record credits/debits in accounting records
  • Process vendor invoices
  • Receive cash
  • Mail checks/authorize electronic payments
  • Approve invoices for payment
  • Distribute payroll
  • Authorize purchase orders
  • Authorize employee timesheets
  • Approve payroll
  • Disburse petty cash
  • Prepare annual budget
  • Sign checks
  • Sign employee contracts
  • Complete deposit slips
  • Perform interbank transfers
  • Review bank reconciliations and contents of bank statements
  • Approve annual budget
  • Review monthly financial statements

 

Four-Person Office

Bookkeeper

Clerk

Office Manager

CEO or Owner/Manager

  • Record accounts receivable entries
  • Reconcile petty cash
  • Write checks
  • Record general ledger entries
  • Reconcile bank statements
  • Record credits/debits in accounting records
  • Distribute payroll
  • Receive cash
  • Disburse petty cash
  • Authorize purchase orders
  • Authorize check requests
  • Mail checks
  • Authorize electronic payments
  • Complete deposit slips
  • Process vendor invoices
  • Approve payroll
  • Approve invoices for pay
  • Prepare annual budget
  • Sign checks
  • Sign employee contracts
  • Approve employee timesheets
  • Perform interbank transfers
  • Review bank reconciliations and contents of bank statements
  • Approve annual budget
  • Review monthly financial statements

Following some of these suggestions will let employees know that management is focused on strong ethical policies. They also help to focus management on the day-to-day operations and financial reporting objectives of the organization. It also means management will be able to answer the question: “If someone were to commit fraud, how would they do it?” While properly segregating duties may, at times, seem inefficient and redundant, one circumvented fraud will make you awfully glad you were able to answer your auditor’s question.

Author: Debbie Roessl Dimery, CPA, Partner 

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