Segregation of Duties for Small Businesses

by | Sep 14, 2022 | Business

In my years as an accountant, I’ve found that one of the top aspects of fraud prevention that small businesses often neglect are internal controls. Internal controls are policies and procedures service-based businesses can implement to keep the organization on track to reaching its goals.

They can:

  • Ensure the accuracy of financial data
  • Hold employees accountable for their actions
  • Prevent fraud

Segregation of duties is an internal control that a lot of entrepreneurs find difficult to implement. Using my wealth of experience, I’ve written down exactly how to handle the segregation of duties for your small business. 


What is segregation of duties?

The American Institute of Certified Public Accountants (AICPA), the world’s largest association of accountants, defines segregation of duties as “shared responsibilities of a key process that disperses the critical functions of that process to more than one person or department.” 

This internal control ensures that no one person is responsible for all elements of a transaction or process. No one employee should have all the responsibility. It builds checks and balances into business systems so that the risk of fraud or error is decreased. 


Why is it important?

People are prone to error, but also susceptible to manipulation and greed. Segregating duties at a service-based business, though, takes those three things off the table. 

Let’s check out two examples.


Example #1: Error

Say you own a small property management company. Your receptionist checked the mail and found an invoice from the office cleaner, Laurie Smith, that was due that day. Her job includes both inputting the invoice into your accounting software and sending the payment via ACH through your bank. She submitted the payment to Laurie right away as it was due that day.

When you checked your bank account later that week, you found that a payment was submitted to a Corey Smith that you didn’t recognize. Your receptionist accidentally paid the wrong vendor! How could you have prevented this error?


Examples #2: Greed

Say you just hired a new assistant for your personal training business. You hired them to manage paperwork and take payments from clients. A week into their employment, they met with one of your clients to sign off on your contract and collect the first month’s payment. The client paid $250 in cash, but $200 only made it to the bank when your assistant made the deposit. 

The client claims they paid the full amount, but your assistant says otherwise. Someone’s not telling the truth! What can you do to prevent issues like this in the future? 


How to implement segregation of duties for your small business

Segregating duties amongst employees at a small service-based business is notoriously difficult as you have less staff over which to spread responsibilities. In an ideal world, you’d have one employee for each task, with multiple sign offs for each item. However, no business operates in such a world.

First start by making a comprehensive list of all work functions, duties, and responsibilities. You’ll find a lot of duties are related to one another. Group those duties together and then assign the correlating tasks to different employees. 

Here are a few quick examples of related tasks that should be assigned to more than one person:

  • The person who writes and mails checks should be different than the person who approves and signs the checks
  • The person who approves payroll should be different than the person who distributes the payroll
  • The person who does the data entry for invoices and payments should be different than the person who reconciles the transactions to the bank account

Segregation of duties for your small business can also be achieved through well documented processes when there aren’t enough employees to go around. Make sure you have receipts for all financial transactions, save related documents to a company shared drive that is backed up on the cloud, and use checklists to keep on track. 


Circling back to our two examples, here’s what I’d change about the business processes as your accountant.


Example #1: Error

Your receptionist has too much responsibility when it comes to ACH payments. One great tool to implement would be requiring approvals on all payments. A lot of online business banking portals allow you to turn on manager approvals for payments, making sure no payment goes out before you confirm it. This would ensure two sets of eyes are on all payments so errors are less likely to occur. 


Examples #2: Greed

Your new assistant most likely pocketed that $50. While fraud can’t always be prevented, it can be detected with strict cash handling procedures. The person responsible for collecting cash should never be the same person responsible for depositing it. Have your assistant drop the cash off to you in person and you go to the bank to deposit it yourself. Create a new cash receipt that both your assistant and the client must sign and hand off to you to ensure all of the money is accounted for. 


Let me help you implement a segregation of duties at your small business. 

Book a one-on-one with me today!