Segregation of duties for the small organization
It can be difficult and challenging for a small organization to maintain appropriate segregation of duties over account areas such as cash, receivables, and payables; however, the benefits are worth pursuing. These benefits include increased internal control, reducing the opportunity for theft, and limiting the potential for intentional or unintentional errors that could be made and not detected.
Depending on the size of the organization, there might be two, three, or four individuals who can assume various accounting duties. Those individuals could include the bookkeeper or accountant, office manager, clerk, and owner (or manager, president, or chief executive officer). The owner must then consider the steps to each accounting process, who is responsible for each step, if there is an opportunity to commit theft, and if it is possible for an error (either intentional or unintentional) to go undetected.
Consider the steps to the accounting process and who completes each step
Within the accounts receivable (A/R) process, consider who receives cash, prepares deposit slips, records the A/R entries in the accounting system, performs interbank transfers, reconciles the bank statements, and reconciles the petty cash. Is it the same person? If yes, then a segregation of duties problem exists. A way to improve the process from an internal control standpoint would be to divide the responsibilities between two to four people. One person should not have the authority for authorizing a transaction, recording the transaction, and maintaining physical custody of the asset.
Could theft or errors go undetected?
In the A/R example, if one person were doing each of those steps listed, he or she would have an opportunity to steal and would be more likely to be responsible for errors (either intentional or unintentional) that may go undetected. If a single person is completing all the steps, it could be at least a month or more until an error is detected, which could have a material impact on financial statements.
Business owners should look for new ways to eliminate or diminish segregation of duties problems at least once a year in order to protect their business interests. An annual review of each accounting process will strengthen internal control, eliminate opportunities for theft, and diminish the potential for errors to go undetected. This could also set the tone of the organization’s culture in that those charged with governance are continually monitoring internal controls. For a small entity, the owner must be willing to be an active participant in the process in order to alleviate the segregation of duties situation.
Julia Mohs is a staff accountant with SVA Certified Public Accountants.
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