By Landon Jones
Many people without an accounting background might ask, “Segregation of what? What duties are we talking about?” which is understandable considering all the catchy accounting phrases out there, but the actual phrase details what it means. Segregation of duties is the structuring of the accounting processes and procedures, so that one individual does not have too much control within the accounting function of an entity, therefore different individuals (or departments) are given specific tasks to avoid this happening. In theory this should be easy to accomplish, you just establish a purchasing, accounting, billing and (your choice here) department and don’t let their tasks overlap, but in reality, some businesses, non-profits, and small governmental entities don’t have the means and personnel to accomplish this level of separation.
So, what can these smaller entities do to limit the risk that is inherently present due to their size? They have to be creative with how they use their personnel and institute processes that allow for an adequate level of management review. This oversight should focus on high risk areas, such as cash collections, cash disbursements, credit card usage, expense reimbursements, purchase approvals, etc. The last thing an entity would want is the same individual collecting cash, writing checks, reconciling the bank statements, making deposits, and recording everything within the accounting function, as the potential for fraud and theft are too strong, therefore smaller entities would need to focus on either breaking down their processes and/or emphasizing a heavy focus on documented oversight. Also board members can be incredibly helpful in the oversight process by being actively involved and becoming a part of the review function within the entity.
So, if you are a smaller entity and you keep getting an audit finding related to Segregation of Duties, you may be able to decrease the severity of the finding or at least mitigate your risk. Look over your accounting processes and determine what tasks can be separated between individuals and what areas are of a higher risk. Examine instituting procedures that incorporate selected board members into the oversight process, and be sure that you are adequately documenting all levels of review that occur within your process so that physical support is present. After you have completed this assessment, contact your audit partner or manager, and speak with them about what you have noted and how you are planning to deal with it.