Segregation of Duties (#178)
/In this podcast episode, we discuss how to handle the segregation of duties in a small business. Key points made are noted below.
The Need to Segregate Duties
The segregation of duties involves keeping one person from performing every task in order to reduce the risk of fraud. For example, one person could create a fake employee in the payroll system, pay the person, and keep the payment. If there were two people involved in this process, then one person could perform the initial payment processing, while someone else approves the payments - thereby reducing the risk of fraud.
Options for Segregating Duties
The segregation of duties can be quite difficult when there are few people in the accounting department. In this case, there is no perfect solution. Any outcome will inconvenience someone, or cost more, or involve an increase in the risk of fraud.
One option is to segregate duties by bringing in someone from outside the department. However, this person is not familiar with accounting processes, and takes the person away from his regular work. If you do this, only assign the person a simple task that he will readily understand.
Also set up a backup person, in case the first person is out of the office. This involves additional training. Do not assign an excessively junior person to the backup role, since they may not be willing to speak up about issues that they find.
Schedule accounting activities well in advance, so that the outsider who is helping out on segregated tasks can include accounting tasks in his schedule. This reduces the need for a backup person.
You could pay an outside accountant to come in periodically and assist with segregated tasks. Would probably be someone from a bookkeeping or CPA firm. This can be expensive, and they may only be able to assist at longer intervals.
You could alter procedures to minimize the need for segregation of duties, such as by having customers sent their payments to a lockbox at the bank - so there is no cash receipts handling within the firm.
A final option is to accept the risk of fraud and not segregate duties at all. If so, at least try to segregate tasks when there is a risk of losing a large amount of money.