The Importance of Separation of Duties in Fraud Prevention
Separation of duties is a control measure where the responsibility of the acquisition, custody, and related record keeping of assets are separated and not all assigned to just one individual. Breakdown in this internal controls can result in potential fraud. Separating duties will not completely eliminate fraud but it will reduce the likelihood of it happening. However, there are still a few pitfalls that internal controls cannot fully mitigate. These include Collusion and Management Override. It is still important to monitor the internal controls and provide training for employees. An employee who invoices customers should not be the same employee who records the payments into the accounting system, deposits the money in the bank, or reconciles the account. These three duties should be assigned to different people. No only does separation of duties reduces fraud but it also reduces errors as the duty of verifying and checking for errors can be assigned to another employee. In a recent conversation with a colleague, she mentioned that in her company, the Treasurer also does Accounts Receivable and Accounts Payable. This is a definite red flag for fraud as no one person should be in entire control of the money process. There are also other steps to take in the separation of duties process and these includes mandatory vacation for employees. When employees are required to take vacations then that opens the door for an independent work and review of the accounting process by another employee. Oftentimes, frauds are discovered this way.
By Shauna Craib