This is a common conversation we have with schools in relation to the accounting function. It’s critical to have effective internal control because it reduces the risk of mistakes and inappropriate actions. Our team has put together a useful guide to help you work through this issue.
Segregation of duties is the concept of having more than one person required to complete a task, ensuring that incompatible jobs within a system are not completed by the same person. Segregation of duties is critical to effective internal control because it reduces the risk of mistakes and inappropriate actions. Not having segregation of duties also places a large burden of trust on a small number of people within your school.
As a guide, for most transactions the following functions should be separated among employees (e.g. for a payment made by your school):
- Initiation (completing a purchase order)
- Approval (authorising purchase order and payment of an invoice)
- Accounting/reconciling (recording of the transaction in the ledger and month end reconciliation process)
A detailed supervisory review of related activities is required as a compensating control activity if these functions cannot be separated.
Examples of segregation of duties:
- The person who requisitions the purchase of goods or services should not be the person who approves the purchase.
- The person who approves the purchase of goods or services should not be the person who reconciles the monthly financial reports.
- The person who approves the purchase of goods or services should not be able to obtain custody of cheques.
- The person who maintains and reconciles the accounting records should not be able to obtain custody of cheques.
- The person who opens the mail and prepares a listing of cheques received should not be the person who makes the deposit.
- The person who opens the mail and prepares a listing of cheques received should not be the person who maintains the accounts receivable records.
No one person should perform all of the following tasks:
- Initiate a transaction
- Approve a transaction
- Record a transaction
- Reconcile balances
- Handle assets
- Review reports
We recognise that in a most schools the number of administration staff is limited. This often means that segregation of duties can be difficult to achieve and that a number of the above functions will be performed by the same person. While this may not be ideal from an internal point of view, it is the reality of the situation.
Where we find that segregation of duties is not occurring, we may raise a note about this in our management letter. The reason being that we believe it is important that your board or the schools senior management team should be aware of this and possibly committing more resources or monitoring more closely to the day to day accounting function at your school. This will normally be through a more detailed than normal review of the monthly financial statements. Such management letter point is in no way a reflection on the people working at your school and is not intended to bring into question their integrity. It is merely a commentary on the systems and internal controls present in your school.
Should you have any questions about internal controls at your school or whether not they are appropriate, we may be able to assist through a detailed review of these systems and suggest ways in which your internal control environment can be strengthened. Feel free to get in touch to discuss the possibilities of how we could help.