Divide and Conquer Risks: Segregation of Duties in Small Businesses

The most effective way to ensure oversight, improve accuracy and prevent fraud is by dividing crucial duties and responsibilities across the organization. Despite being a small business that may have only two or three people in the business office, there are many ways you can distribute processes to protect against fraud or error.

Practical tips:

• Know what processes should be separated. In general, make sure that no one person controls an entire financial process from beginning to end. For example, your cash disbursement process should separate access to cash/checks, reconciling bank statements, recording transactions, and approving payments (i.e., signing the checks or approving electronic payments). In payroll, the person who enters employee information or payroll adjustments into the system should not also prepare disbursement records or send payroll disbursements.
   
• Look outside the business office for assistance. Some tasks — such as recording cash and checks received, reconciling ledgers and matching monthly credit card charges with detailed receipts — can be delegated to staff outside the finance office, such as mid-level managers or administrative staff.
   
• Educate the helpers. When seeking help from people outside the business office, you must train them. They need to understand not only what you’re asking them to do, but also why it’s important. Teach them what risks to be aware of, what to look for in reviews and reconciliations, and what processes should be separated.
   
• Require vacations or rotate staff. Duties should be segregated over time, not just by process. An employee who resists taking vacation may be very dedicated, but that individual may also be afraid to let anyone else see the checks going out. Rotate duties each quarter to eliminate dark corners.
   
• Create and review reports to help identify irregularities. For example, reports on budget versus actuals, new vendor set-ups, purchases by vendor, new hires and terminations, and payroll change reports can all highlight unexpected activity so it can be investigated. Data analytics can also be used to uncover suspicious activity, such as discovering a vendor whose address matches an employee’s.
   
• Stay alert for unusual activity such as transactions or processes that are being handled differently from the rest. There may be a good reason, but such outliers should be carefully scrutinized.

Dividing responsibilities may take a considerable amount of time and work, but the benefits far outweigh it all. Taking early precautions can only help your business make the headlines for outstanding achievements.