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Ensuring Financial Security: Why Segregation of Duties is a Crucial Internal Control

April 08, 2024

Do you have the right internal controls in place to safeguard your organization against errors, fraud and mismanagement? Here’s how segregation of duties can help.

With the implementation and proper monitoring of internal controls, an organization decreases the opportunity for fraudulent activity and minimize the risk of errors. Segregation of duties is one of these crucial internal controls. How can you effectively implement this control? Let’s explore.

What is segregation of duties and what are the benefits?

Segregation of Duties is the process by which various steps of an internal process are assigned to different people. This internal control is crucial because it:

  • Reduces the opportunity for errors and fraud.
  • Protects your public image. Donors are increasingly conscious of what organizations they are giving to and ensuring your books are in order is pivotal to your public image.
  • Ensures good standing and continued funding. Even more importantly, if you are subject to compliance requirements with funding sources, internal controls are vital to your continued funding and good standing.

This can be more difficult to put into place when you have a smaller organization or finance department.

Top practices for effective segregation of duties:

1. Evaluate and give precedence to risks – Leverage your board and management to perform a comprehensive risk assessment to identify the critical areas that require segregation of duties. Select the processes and functions that involve significant financial transactions, cash handling, and sensitive information.

2. Implement compensating controls - In situations where limitations do not allow a complete segregation of duties, compensating controls can be put in place. These controls are designed to provide alternate checks and balances to mitigate the risk of error or fraud. For example, independent reviews and approvals, regular reconciliations, and periodic internal or external audits can serve as compensating controls. Keep in mind an external audit is not a compensating control.

3. Use technology – There are many cost-effective technology solutions to automate and streamline processes. This reduces the possibility of manual error and manipulation. For example, many organizations have opted to automate their accounts payable and bill payment with an online platform. This is an excellent way to leverage technology.

“Internal controls should be reviewed and updated often as changes happen regularly. It is important to establish a culture of ongoing monitoring and improvement, where feedback and suggestions from staff members are encouraged and incorporated into the control framework. This ensures accuracy, regulates risk and makes employees more vested in the organization.” -Lauren Amaral

4. Cross-train staff - While it may not be possible to have dedicated individuals for each task, cross-training staff members can help alleviate segregation of duties concerns. By training employees to perform multiple roles and responsibilities, the organization can create a more flexible workforce that can step in when needed, reducing the risk of collusion or fraud. This is a good way to leverage employees outside of the accounting department.

5. Prioritize managerial oversight - Implement a system of managerial oversight to ensure that critical processes are monitored effectively. This can include regular review of financial reports, conducting surprise audits, and maintaining an open line of communication for employees to report any suspicious activities or concerns.

6. Board involvement and oversight - Engage board members and volunteers who possess relevant expertise in financial management, internal controls, or auditing. Their involvement can provide an additional layer of oversight and ensure that appropriate segregation of duties is maintained. Board members will typically be very open to this involvement and it is a good way to help them feel more connected to your organization.

Do you need help implementing proper segregation of duties? We can help. Reach out to us.

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