Fraud and embezzlement don’t just happen at large companies. In fact, theft may be more common in small businesses because many lack the internal controls typically found in larger organizations. But the good news is that effective internal controls don’t have to be complicated or expensive. The best way for your business to battle fraud is to create a segregation of duties framework. With segregation of duties, you split the responsibilities across three areas: authorization of cash expenditures, physical custody of cash, and reconciliation of cash expenditures among different individuals. Here’s what you need to know:

Segregation of duties

1. Segregate cash disbursements. Payment responsibilities should never rest with a single individual. One employee should review and approve vendor bills, while another processes the payment. The person preparing checks should not have the authority to sign them. Electronic payments and fund transfers require similar separation: one person initiates the transaction, another reviews the details, and a separate, authorized manager provides final approval. The same layered approach applies to purchase orders: one team member issues or requests the order, another approves it, and payment is released only after proper review. Dividing these duties ensures management has visibility into how funds are spent and significantly reduces the risk of error or misappropriation.
2. Segregate control of cash. Have an owner or manager occasionally spot-check incoming electronic transactions and tie them to the company bank account. If you receive physical checks, have an owner or manager open the mail before passing it on to accounting. That’s one way to detect unusual transactions before they’re recorded in the company books. Alternatively, you might ask someone outside accounting to open the mail and either prepare a deposit slip or perform a daily reconciliation of all transactions.
3. Segregate reconciliations. For companies with limited resources, a periodic review of bank reconciliations by someone outside accounting can serve as a mitigating control. Non-accounting personnel performing these reviews will need to be trained. They’ll need to understand the risks involved and the types of unusual or unsupported transactions needing further investigation. Cross-training staff also helps to ensure continuity of operations when accounting employees take vacations or leave the company. Or better yet, bring in an outside accounting expert to conduct periodic audits of key functions.

Safeguard your business

• Pay special attention to ACH receipts. Unlike physical checks, which leave a paper trail and involve multiple handling steps, ACH payments post directly to a bank account without anyone physically touching the money. This convenience reduces natural oversight points. If the same person has access to online banking and records receipts in the accounting system, errors or intentional misstatements may go undetected.
• Management by wandering around. As an owner, periodically review your bank accounts and their activity. Ask questions about large transactions. Even if you already know the answer, your team will know you are looking. The same goes with your general ledger. Get access to the ledger and periodically review the details for a few accounts. You may be surprised by what you find. Again, your questions will show your engagement, and the randomness of this activity will serve as a simple audit technique.

Segregation of duties can help your company track cash and prevent employee theft before it happens. Contact our RRBB advisors for more information or if you have any questions.