Friday, June 11, 2010

Segregation of Duties

As a CPA and business advisor, I hear about fraud and material errors far too often. Due to the lack of internal controls, small businesses are especially vulnerable. According the Association of Certified Fraud Examiners (ACFE), the median loss from fraud at a small business was over a $100,000 in the US. It is important for every organization create an appropriate internal control environment to reduce this risk.

A fundamental element in a strong internal control environment is the segregation of duties (SOD). By separating certain duties within an organization, no single employee should be in the position to both perpetrate and then conceal either errors or fraud. While the SOD can be difficult in a small organization, understanding this can help you improve your own control environment.

The principle duties that are incompatible and should be segregated are:
  • Custody of assets.
  • Authorization
  • Recording keeping
  • Reconciliation
Ideally, a different individual would do each of these duties since they serve as checks and balances on each other. By separating the tasks, the system would catch any errors unless two or more employees colluded. Collusion can override even a well designed system.

You must build checks and balances into your financial systems. Simple accounting errors, if gone undetected can devastate a company. Fraud as well. A strong and appropriate system of internal controls will reduce risk and increase accountability. Make sure you design these principles into your accounting system.

I haven't had a chance to check this out but found this free Fraud Prevention Check-up on the ACFE website:

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