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The Importance of Segregation of Duties for your Employees

When your small business grows and you invest more hours and effort into developing it, the unfortunate reality is that you have significantly more to lose as a consequence of errors, dishonestly, and fraud. This is certainly of distinct importance with bookkeeping and accounting because they deal with handling and tracking money that comes in and goes out of your company. For instance, an immoral and competent bookkeeper who was entirely responsible for all aspects of the bookkeeping for your small business could easily steal money from your business and cover it up.

We realize that as the boss, you like to think that you’ve got a keen eye on every part of your business, but even the most diligent owners can’t possibly watch everything like a hawk all of the time once their business reaches a decent size. So, how can you decrease the risk of errors or theft as your small business grows? Segregation of duties is an tremendously important concept which can accomplish that, and must be effectively applied in any company.

What is Segregation of Duties? To put it simply, it means structuring the standard tasks of your small business in a way that multiple people are required to complete it. A basic example of this is having two individuals required to sign checks. This greatly reduces the chance that a signer on the business bank account will write bogus checks to launder funds out of the business, because he or she knows the other person will see and sign every check the other person writes.

Having two or more people needed to complete any job regarding business finances has been proven to substantially lessen the incidence of both mistakes and dishonesty. Hopefully it makes sense why this is the case. With multiple people being required to complete a task, there will be more than one set of eyes to notice potential errors or fraud. Moreover, any kind of fraud will require collusion between two or more employees, which is far less likely to occur than if a single person could get away with it on their own.

As any small business evolves and the volume of staff increases beyond just the owner, Segregation of duties for bookkeeping tasks is incredibly important. The “rule of two” is a good starting point. What this means is that any task involving the finances of your small business should require multiple people to complete. Here are some examples:

The bookkeeper prints checks to pay vendors, and the CEO signs and sends them out.

The receptionist photocopies checks from customers and hands them over to the bookkeeper to record, then the assistant does the bank deposit

Bookkeeper #1 records all receipts, and Bookkeeper #2 reconciles all accounts to make sure whats recorded in the books actually matches what happened in reality (as shown on the bank statements)

The bookkeeper creates all staff paychecks in Quickbooks, then the owner reviews them and gives them to the payroll company to get prepared.

The bookkeeper runs financial statements to give to your bank, and the owner approves them then actually hands them over.

By now you should get the idea. It’s not an exceedingly complicated concept, but I’m certain you now realize why it’s incredibly important.

Another component of segregation of duties is that it protects employees such as the bookkeeper in addition to protecting the owner. If a bookkeeper’s duties are effectively segregated, he or she is protected against accusations of fraud, because he or she will literally incapable of embezzlement, for example. When your professional reputation is on the line, it’s extremely important that controls exist to protect against false accusations of fraud against you.

Dishonestly in the workplace is an unpleasant issue to acknowledge and handle, but there a realities in this world that all small business owners should be prepared to handle in order to be successful, and effective segregation of duties is imperative in order to protect you, your employees, and your small business.

for more information about the importance of segregation of duties for small business bookkeeping check out small business bookkeeping tips