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Thursday, August 21, 2014

Why Separation of Duties is Essential to Business Controls

Posted by Steve Chapman

Why Separation of Duties is Essential to Business ControlsBusiness controls in your organization can be greatly increased by evaluating business processes and determining whether there is sufficient separation of duties, then making improvements where needed.

The basic guideline in evaluating or designing a business process with a sufficient separation of duties control is to make sure that the person(s) with custody of assets is(are) different than the person(s) with record keeping responsibilities.

For example, you do not want the person who receives the mail and handles cash receipt checks, to also be the person who maintains the accounts receivable records. In this case it would be easy for that one person to deposit the checks in an account they control and then cover up the theft by manipulating the accounts receivable records so that everything looks fine.

Here’s a better way to handle cash receipts:

Person A:

  • Open mail and remove checks
  • Restrictively endorse checks
  • Make photocopies of checks and forward to accounts receivable person
  • Create bank deposit and deposit at bank and forward copy to accounts receivable person

Person B (accounts receivable):

  • Apply check payments to outstanding accounts
  • Compare total cash payments recorded to copy of bank deposit

In this case you have effectively separated the custody of the checks from the record keeping. If Person A fraudulently converts the check for their own use, the customer who sent in the check will wonder why their account does not reflect the payment and an investigation ensues.

Maintaining proper separation of duties for key business areas will improve the internal control environment in your business. Many of these types of controls can be easily implemented. Others may take more analysis and thought to come up with an efficient solution.

In addition to our Dynamics ERP services, Armanino brings a strong accounting background and can help you analyze your business control environment. To get started, contact our team.

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