We have all gotten accustomed to seeing the same recommendation year after year in the audit report regarding segregation of duties. We tend to believe that there is nothing we can do about it either because we have honest employees and don’t need it, or because we are a small organization and cannot afford it. But segregation of duties is important, and you can afford it through proper implementation and the effective use of resources already available to you.
Typical duties in a government include, authorizing checks, handling cash receipts, preparing bank/GL reconciliations and monthly board reports, and processing payroll. While some of these duties such as monitoring the budget and preparing monthly board reports are compatible, others such as preparing and processing payroll, receiving cash/checks, depositing them and reconciling bank accounts are incompatible. Simply put, segregation of duties means that no single employee has control over two or more processes of a transaction that are incompatible. Below are three reasons for segregation of duties:
- It limits how much influence or level of control a single employee has over your government’s business transactions.
- It reduces the risk of misuse of your government’s assets by one or more employees.
- It minimizes the risk that fraud, errors or irregularities carried out or concealed by one or two employees will go undetected.
Of course, small governments may find it impractical and expensive to separate incompatible duties. But, if your Municipality has Board Members and one or two personnel in the Administration office, you can still afford segregation of duties. What is critical is that you think about your risk levels with each process in any given transaction and assign incompatible duties accordingly among your available resources. For instance, the risk involving cash receipts is high since cash can be easily misappropriated. Therefore, segregating each process in a cash receipts transaction is important.
As an example, if your Administration office has a Borough Manager and a Clerk, you can have your Clerk receive cash/checks and have your Manager deposit them. Your Clerk can reconcile your bank accounts and your Manager can review the reconciliation. A similar high risk transaction is check authorization, since checks can be made for incorrect amounts or to fictitious vendors. As mentioned above, each process in this transaction should be segregated. Your Clerk can prepare the payables list and print the checks, but have your Manager and a Board Member both review and sign off on the invoices and checks. Another high risk transaction involves processing payroll, where incorrect hours can be inputted or fictitious employees can get paid. In this case, have the Clerk input and process payroll and your Manager review the timesheets and payroll reports.
Let’s suppose your Municipality is very small and your Administration office has only one personnel, a Township Secretary who handles all administrative and business functions. Segregation of duties is still possible utilizing other bonded non-administrative employees from the Public Works, Code or Police departments. Using the cash/check receipts example, the Secretary can prepare the deposit slips and have a non-administrative employee take the deposits in a locked bag to the bank. For bank reconciliation purposes, the Secretary can perform this function and have a Board Member review the reconciliation and bank statements.
If you think your Board Member is not financially astute to perform the reviews, you can train them by pointing out key items they should consider during the review process. For check authorizations, the Secretary can prepare the payables list, print the checks, and have Board Members review and sign off on the checks. As it relates to payroll, the Secretary can input and process payroll, and have a Board Member review the timesheets and payroll registers.
Where Board Members are not available to provide this oversight, consider getting an external accounting consultant to review your accounting records on a timely basis.
Regardless of the size of your Administration office, segregation of duties is important and affordable. The key is that no one employee has complete control over one or two business processes that are incompatible. Consider your risk levels with each transaction and assign incompatible tasks among your available resources accordingly. Although not a full proof system to prevent fraud from ever occurring, it can ensure that most frauds, errors or irregularities will not go undetected.
Please do not hesitate to contact me with questions or comments.