By Greg Jackson, CPA, Principal, at Blue & Co.
What is Segregation of Duties?
According to the American Institute of Certified Public Accountants, segregation of duties is a basic building block of sustainable risk management and internal controls for an organization. The principal of segregation of duties is based on shared responsibilities of a key process that disperses the critical functions of the process to more than one person or department.
The intent behind doing so is to eliminate instances in which someone could engage in theft or other fraudulent activities by having an excessive amount of control over a process. In essence, the physical custody of an asset, the record keeping for it, and the authorization to acquire or dispose of the asset should be split among different individuals or departments.
Why is Segregation of Duties Important to Not-For-Profit Organizations?
Fraud, embezzlement, and theft are all serious threats to a not-for-profit organization, which is why putting the proper internal controls in place is essential. Beyond the immediate financial loss, however, an even greater potential cost of fraud to not-for-profit organizations is the reputational damage that can occur. Because most not-for-profits depend on support from donors, grantors or other public sources, their reputations are among their most valued assets.
One of the most important internal controls is having good segregation of duties, meaning that you have various employees handling the not-for-profit’s funds and accounting documents. However, many not-for-profit accounting departments do not have proper staffing to allow for extensive segregation of duties due to small staff sizes or limited expertise.
One way to mitigate the risk when there is a lack of segregation of duties is to utilize employees outside of the accounting department and board members to oversee key areas. Below are a few examples of how a not-for-profit organization can utilize a board member and others in the organization to assist in overall improvements in segregation of duties.
Cash Receipts
All mail should be received and opened by a receptionist or someone outside of the accounting department. This person should compile a list of all checks received and make the daily deposit. The cancelled deposit ticket and listing of checks received should then be forwarded to accounting personnel for entry into the general ledger. The checks received listing, monthly bank reconciliation and the unopened bank statement should be sent to the Board Treasurer for timely review at the end of each month end close.
Cash Disbursements
All invoices should be forwarded to the Executive Director for review and approval prior to entry into the accounting system. All checks over a certain dollar threshold, as determined by Board policy, should require two signatures with one of the signatures being a board member. When the checks are presented for signature, the approved invoice should be attached to the check for proper review.
In conclusion, it is important to remember when developing financial processes one individual should not complete a task from start to finish as strong internal controls must incorporate segregation of duties.
If you have questions regarding internal controls for your organization, please contact your local Blue & Co. advisor for assistance.
