If you are looking to take a few extra steps in order to prevent internal accounting fraud, then you may want to try dividing up tasks. First of all, accounting fraud can happen to anyone–even business owners who are smart, actively involved, and meticulous. Therefore, if it can happen to them, it can definitely happen to you. There are three duties in every business that should be segregated in order to help prevent internal accounting fraud.
Prevent Internal Accounting Fraud Using These 3 Categories
The goal here is to create checks and balances to eliminate easy access to your assets and cash. The three general duties that you need to ensure are separated in your accounting processes are almost always the Custody of Assets, Record Keeping, and Authorization. This applies to A/P, A/R, inventory, and all facets of running your company. See a list below of tasks or items that belong to each duty.
Custody of Assets
Inventory
Supplies
Raw materials accounting segregation of duties
Blank checks
Record Keeping
Bank statement reconciliation
Check number recording
Receiving bills
Entering bills
Time and billing
Authorization
Check signing
Purchase permissions
Credit card purchases
Adjustments to payroll
The goal of these segregations is that no single person owns a full process. Ideally, each area has its own champion, but you don’t necessarily need multiple staff in order to segregate duties. An example would be having two employees review sequencing, POs and vendors together for an additional layer of accountability. You can see how these divisions help prevent internal accounting fraud by simply sharing the responsibility among multiple staff.
Related blog: Does Your Company Need Outsourced CFO Services?
Example of Segregated Duties in Accounts Payable
Here is an example of a well segregated process for accounts payable. The system includes four employees: the receptionist, A/P clerk, CFO, and CEO.
1. Receptionist receives the bills in the mail, opens and organizes them and gives them to the CEO
2. CEO very briefly reviews the vendors and amounts for anything that looks unfamiliar, then gives to the A/P clerk
3. A/P clerk enters bills in the accounting system and prints a report of all outstanding bills for the period, then give that report to the CFO
4. CFO reviews list of bills, purchase orders, amounts, and looks for gaps in check numbers, then approves and returns to A/P clerk
5. A/P clerk prints checks and takes to the CEO
6. CEO signs checks being mindful of unfamiliar items, and the checks are mailed
In this example, the CEO has control of authorization (signing the checks), the A/P clerk has custody of the assets (blank checks), and the CFO has control over record keeping (reviewing reports and reconciling accounts). Typical fraud situations are prevented here because there is always another layer of review anytime money is going out the door.
Segregation of duties protects your most liquid asset-your cash. How do you segregate duties? Have you implemented other anti-fraud processes?
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By Senior Audit Manager at WHH
