Segregation of Duties and Cash Related Challenges for Small Businesses

As controllers and accountants, we are frequently asked to serve as treasurers for small businesses and volunteer organizations. One of the biggest challenges facing these and other small for-profit organizations is properly segregating duties to prevent or detect fraud or errors.

What is Segregation of Duties?

Segregation of duties is the concept of having more than one person required to complete a task, especially where the risk of fraud is high. When organizations don’t have enough resources to segregate duties effectively, leadership can take steps to mitigate the risk in cash receipts and cash disbursement processes.

Cash Receipts

The payment receipts, bank deposit, and recording roles should be segregated in the cash receipts process to ensure funds are not intercepted between receipt and deposit. Someone other than the Treasurer should receive and document all cash and check receipts when possible.

This prevents one person from having sole knowledge of all incoming funds. In many organizations, this role is effectively performed by an Office Manager.

If cash receipts for the organization offset Accounts Receivable, someone other than the Treasurer should send routine reminders to customers with outstanding balances. If payments were received but not recorded, the customer would likely reach out to confirm receipt of payment.

Cash Disbursements

In the cash disbursements process, the authorization, payment, bank reconciliation, and recording steps should be segregated to ensure funds are only disbursed to authorized vendors for approved amounts.

Organizations need one other individual than the Treasurer with view-only access to the bank account to routinely review transactions. Periodic evaluations act as a preventative control against fraud. This individual could also perform monthly bank reconciliations.

Receipts and Vendors

Receipts for all payments should be stored where someone other than the Treasurer can routinely review them. For many organizations, this person would be the same individual with view-only access to the bank account.

Requiring receipts to be stored in a location accessible by this individual serves as a preventative and detective control for the organization.

Someone other than the Treasurer should also have access to set up all new vendors in an organization’s accounting system. This prevents the Treasurer from recording payments for unauthorized vendors.

It is crucial to have someone independent of the payment processes to set up new vendors to ensure proper supporting documentation is present and that the goods and services provided appear legitimate.

Best Practices

Segregation of duties is a fundamental building block of sustainable risk and fraud management for any business.

Here are the four general categories of duties or responsibilities to consider when your organization segregates its duties:

• Authorization: being able to authorize the use or purchase of assets.
• Custody: having physical control of assets.
• Recordkeeping: having authority to enter and release transactions of assets.
• Reconciliation: performing any reconciliation of accounts of assets.

In an ideal system, different employees would perform each of these four major functions. Aside from cash receipts, cash disbursements, and duty categories, the following best practices can further mitigate risks associated with your small business:

• Consider cross-training one other person to perform the Treasurer’s duties.
• Another individual besides the Treasurer should review a Budget to Actual report and a Current Year to Prior Year Activity report.

If your small business or non-profit needs assistance establishing a control environment with the right level of segregation on duties, contact Kris Pratte.