Strengthening Financial Controls Through Separation of Duties

One of the most critical components of financial control in any business is the separation of financial duties. This practice not only reduces the risk of fraud but also ensures that no one employee has control over the entire financial process. By dividing accounting functions into smaller tasks and assigning them to different employees, businesses can create a system of checks and balances that protects their financial integrity. In this blog, we’ll dive into why separating financial duties is essential, how to implement it, and the benefits of doing so.

Splitting Accounting Functions

Splitting accounting functions is essential for ensuring your financial operations are running smoothly and efficiently.  For example, instead of having just one person manage every aspect of all your financial transactions, split tasks into smaller parts.  This allows you to delegate responsibilities to various team members so that no single employee controls the entire process from start to finish.

This concept works for even the smallest tasks within the accounting department. When you document your financial procedures, you can break them into distinct steps that can be assigned to different employees. For example, paying vendor bills is a multi-step process that can be separated into three distinct parts:

1. One person enters the bill into the accounting system.
2. A second person reviews and approves the bill.
3. A third person schedules and processes the payment.

By splitting up these tasks, you can create that system of checks and balances, thus reducing the risk of errors and fraud.

Delegating Tasks to Different Staff Members

Assigning tasks creates accountability and helps maintain a streamlined month-end close process. In addition to added security, splitting tasks also helps make sure work gets done efficiently. When specific tasks are assigned to team members, there’s a clear understanding of who is responsible for what, which reduces bottlenecks and ensures the tasks are completed on time and correctly.

In accounting, delegating tasks helps spread responsibility across the team so that no one person has the ability to manipulate an entire financial process. This adds another layer of security, especially when dealing with sensitive data, such as vendor payments or payroll. Additionally, rotating roles between employees ensures cross-training, so your team can maintain continuity if one team member is absent.

Managing User Access in Financial Systems

Accounting systems like QuickBooks Online (QBO), allow your business to control user access and permissions, so different employees have access to only the information they need to perform their specific duties. For instance, the person entering bills shouldn’t be the same person approving or paying them.

By configuring your accounting software with different user roles, you can prevent unauthorized access to critical financial information. Most systems also offer additional security features like two-factor authentication, encrypted data channels, and time/date-stamped audit trails that record who did what and when. These features can be powerful tools in fraud prevention.

Example: Paying Vendor Bills

Let’s take a closer look at the steps involved in paying vendor bills to highlight how separation of duties works in practice:

1. Entering Bills: One staff member is responsible for entering vendor bills into the accounting system. Their duties might include validating the bill’s accuracy, verifying supporting documentation, and assigning the correct chart of accounts.
2. Approving Bills: A different employee reviews the entered bills and approves them for payment. They may verify that funds are available and check for any red flags or discrepancies.
3. Paying Bills: Finally, a third person is tasked with scheduling the payment. This individual ensures the payment method is correct and that the payment is sent out on time.

Each of these steps can have its own checklist to ensure that the task is completed accurately and thoroughly. For example, the person entering bills may follow a checklist that includes verifying the remittance address and selecting the appropriate account codes, while the person scheduling payments may follow a different checklist that includes verifying available funds and reviewing approval notes.

Continuous Review of Fraud Controls

Fraud is a constant threat, and accounting professionals need to stay vigilant. Regularly reviewing fraud controls is essential to ensure they continue to work effectively. Businesses should strategize and implement new controls over time to adapt to evolving threats. Fraudsters are always looking for weak spots, so it’s important to stay ahead by regularly reevaluating existing controls and adding new layers of security to cover weak points.

A significant part of preventing fraud is ensuring that no one has too much control over any financial process. For instance, the person who deposits customer payments should not be the same person who records the transaction in the accounting system. This prevents any one person from both handling cash and recording what happened to the cash, a combination that could allow fraudulent activities to go unnoticed.

The Domino Effect of Proper Financial Controls

Implementing proper financial controls not only safeguards your company from fraud but also improves operational efficiency. When employees know that their financial activities are being observed and verified, they tend to be more meticulous. The concept known as the Hawthorne Effect, finds that individuals modify their behavior in response to being watched.

The approval process becomes a key aspect of this, as it adds another set of eyes on every transaction. In many cases, having more than one approver can further enhance security. This multi-tiered review process can apply to a wide range of financial transactions, such as vendor payments, customer invoices, employee expense reports, and time sheets.

Further Examples of Separation of Duties

There are numerous ways to implement separation of duties beyond the examples already mentioned:

• Purchasing and Payroll Authorization: Ensure that purchases, payroll, and disbursements are authorized by someone other than the person handling payments.
• Separate Cash Handling and Record Keeping: The person handling incoming payments should not be responsible for recording those transactions or reconciling the accounts.
• Check Writing and Signing: The person authorized to write checks should be different from the one signing them, ensuring no single person controls the entire payment process.
• Mail Handling: Whoever opens the mail should stamp checks “For Deposit Only” before passing them to the person responsible for depositing funds. This ensures that checks can’t be cashed fraudulently.
• Reviewing Audit Logs: Periodically review your accounting system’s audit logs, particularly for deleted or voided transactions, to detect any suspicious activity.

Small Businesses and Limited Staff

For small businesses with fewer staff members, separating duties can be challenging. In these cases, it’s important to have independent checks, even if that means involving board members or external auditors. Additionally, requiring accounting staff to take vacations can help identify fraud, as their absence might reveal inconsistencies in the financial records.

Conclusion

Separation of financial duties is so important for sound financial management. By splitting accounting functions into smaller parts, assigning them to different employees, and managing user access within financial systems, businesses can protect themselves from fraud and ensure that financial transactions are accurate and secure. Regularly reviewing these processes and fraud controls is key to maintaining the integrity of your organization’s financial operations.