Separation of duties – a term we often hear in business. What does it mean and why is it important? Separation of duties, in the accounting profession, means establishing processes and procedures that involve more than one person to complete a full cycle of one transaction type. Why would a company want to involve multiple people to complete one task? While this sounds like a waste of time and resources, it plays a crucial role in risk mitigation. By involving multiple individuals in one transaction cycle, a business can protect itself and its employees from potential error and fraud. Involving two or more people prevents one person from gaining complete control over a single process thereby reducing the opportunity for such acts to occur.
No business owner wants to be defrauded by their own employees, yet this often occurs when there is one person handling multiple or all steps of one transaction cycle. This happens so often in small business. For example, Jane opens and sorts the mail daily into appropriate categories (invoices, bills, checks received, etc.) and delivers it to the appropriate departments. Jane is also in charge of going to the office store down the street and buying office supplies on the company account. Because Jane is the first person who sees the mail, she can easily conceal bills detailing personal items she is buying on the company account. If no one else reviews the AP process, months could go by before anyone realizes they are missing bills or have large amounts outstanding, by that point, Jane could have quit. The company is left responsible to pay off the fraudulent charges, and the employee who committed the fraud is no longer there to be held accountable. Furthermore, assume that Jane is also in charge of entering, paying bills, and taking collections calls. With no one else reviewing her work, significant damage could occur from fraud and go undetected indefinitely.
It is essential that a company set up clear roles and responsibilities for each job. By doing so, this gives employees a thorough list of what they are expected to do, when they are to do it, and who will be reviewing their work. Accountability is a crucial aspect in the separation of duties. Without various levels of review, even the best internal control procedures can be rendered meaningless. By having proper checks and balances in place, a business can catch errors and fraud immediately. Make these controls public to deter staff from committing fraud from the start.
Separation of duties, while just one of many internal controls a company should implement, vastly increases the credibility of accurate financial reporting for both internal and external parties. Reducing the risk of fraud in your business helps create a culture of accountability and protects the business from unnecessary or unplanned loss.Written by: Andrea Murray TGG Accounting