Segregation of Duties
"Segregation of Duties (SOD) is a basic building block of sustainable risk management and internal controls for a business. The principle of SOD is based on shared responsibilities of a key process that disperses the critical functions of that process to more than one person or department. Without this separation in key processes, fraud and error risks are far less manageable." (Source: AICPA)
It is important for IDHS providers to have sound business practices by employing a variety of internal controls. Good internal controls policies ensures that the organization is doing everything possible to prevent and detect any possible waste or fraudulent activities. Sound internal controls protect the organization and the people they serve. More information may be found in the Uniform Guidance 2 CFR 200.303 Internal Controls.
Segregation of duties is a key internal control intended to minimize the occurrence of errors or fraud by ensuring that no employee can both perpetrate and conceal errors or fraud in the normal course of their duties. Generally, the primary duties that need to be segregated are:
- Authorization or approval
- Custody of assets
- Recording transactions
- Reconciliation/Control Activity
Some examples of incompatible duties are:
- Authorizing a transaction and receiving and maintaining custody of the asset that resulted from the transaction
- Receiving funds (checks or cash) and approving write-off of receivables
- Reconciling bank statements/accounts and booking entries to general ledger
- Depositing cash and reconciling bank statements
- Approving timecards and having custody of pay checks
Fiscal Administrative Review (FAR)
The FAR verifies that a provider has appropriate segregation of duties to ensure no one person has sole control over the lifespan of a transaction. Ideally, no one person should be able to initiate, record, authorize and reconcile a transaction. As a general guideline, the person performing bank reconciliation(s) should be independent of all other accounting functions.
Small organizations often must employ more resources to achieve the proper segregation of duties/checks and balances. For example, the organization's executive director could approve bills to be paid but should not issue or sign the checks. The bookkeeper or office manager could issue the checks which are then signed by the board treasurer.
