Last month we kicked off a 3-part series of Nonprofit Accounting Quick Tips for maintaining best accounting practices. Today we’re talking about the Segregation of Duties. Though it may be tempting to assign one person all financial related tasks, especially if you have a small or new organization, it’s critical that you segregate duties when it comes to money related processes. Your organization, donations, and staffing depend on it.
What is the Segregation of Duties?
Segregation of duties is the process by which various steps of a process are assigned to different people to reduce the opportunity for any one person to be in a position to both perpetrate and conceal errors or fraud. Having an internal control framework that is built on a strong set of segregated duties is optimal but achieving adequate segregation of duties in a small exempt organization can be difficult. That being said, there are some measures that can help reduce the gap in internal controls inherent in smaller exempt organizations:
Guidelines for Small Exempt Orgs:
- If checks or cash are received in the mail by the exempt organization, it is ideal if the person receiving/opening the mail is separate from the person making the bank deposits. Whoever opens the mail should make a listing of all cash or checks received each day and should reconcile that back to deposit records to ensure no items are misplaced in transit.
- Once a check is signed, it should not be returned to the preparer by the signor but mailed directly out. This will prevent any alterations being made to the check after it has been signed.
- Reconcile all cash accounts to the periodic bank or investment statements received by the exempt organization on a timely basis. Any reconciling items identified should be questioned.
- Reconciliations should not be completed by anyone who has signing authority on the account being reconciled. If it is unrealistic to have checks signed by someone other than the bookkeeper or accountant, there should be a threshold over which an additional signature would be required.
- If possible, the top management individual of the organization should review any of the financial reports prepared or reviewed by the top financial individual on a regular basis.
Fraud will never be totally preventable, especially at a small exempt organization, however segregating duties, when possible, helps to create a system of checks and balances which can help reduce the risk that fraud will occur within an exempt organization.
Was this article helpful? Stay tuned for Nonprofit Accounting Quick Tip #3 or check out How to Prepare for a Financial Audit (the Easy Way).