How to Control Risk With Segregation of Duties

Segregation of duties helps companies to prevent theft.

One of the risks that any business may face is theft or embezzlement by employees of the business. Internal and external auditors review the business organization to assess the risk of loss from this type of activity. Typically, the same person should not have physical custody of the assets and also record transactions, or reconcile accounts concerning them. This helps to prevent theft except when two or more people conspire together to accomplish the theft.

Instructions

1. Review the organizational structure of the company to identify who has custody of each type of asset at various times in the asset life. For example, identify the person who opens the mail and records the checks that have been received. Also identify the person who makes the deposit and reconciles the bank account. Assign responsibilities so that three different people perform these tasks.

2. Identify the person who records the accounts receivable. Make sure this person is not the same one who opens the mail and records the checks received. Someone who has access to both could steal checks received and write off the account receivable.

3. Identify the person who requisitions items purchased and the person who approves purchases. Make sure two different people perform these tasks so that unauthorized purchases are not made.

4. Identify the person who has custody of inventory and the people who record and reconcile inventories. Assign tasks so that different people perform these tasks. This helps to prevent theft of inventory since someone other than the one who has custody of the inventory is reconciling the quantities.

5. Secure blank checks and signed checks so that access to each of them is limited to one person. This helps to prevent check theft and forgeries. Employees could steal blank checks and forge signatures. Access to signed checks may give a forger an opportunity to see how to forge the signature. Stolen checks may clear your account and not be caught until the checking account is reconciled.

6. Assign supervisory level personnel to review the detailed reports for each type of asset to make sure that employees are recording and managing assets properly. Conduct these reviews on an ongoing basis, at least monthly.

Tips & Warnings

• If your company is very small, it may not be possible to separate duties as described above. In this case, conduct ongoing detailed supervisory review of all reports and reconciliations each month.

References

• Yale University: Segregation of Duties