Why Government Agencies Need To Segregate Functions and Duties in their Accounting Department
This article is an excerpt from Forbes’s article entitled “Why You Need to Segregate Duties in Your Accounting Department” written by Jennifer Barnes, Founder and CEO of Optima Office, LLC.
We thought this article could open discussion on the need for government agencies, especially those with ‘one-man’ accounting office, to look into their present staffing pattern and weigh in between keeping the cost of human resource to a minimum and the possible impact of this decision in safeguarding public funds.
According to Barnes, companies are more successful when they have a team of people working toward the same goal. However, many businesses (or in our case, government agencies) leave an important part of operations — the accounting and finance department — in the hands of a single employee.
“It is always best not to put one person in charge of an enormously huge asset, cash!”, Barnes says.
In the government, cash may mean the public funds entrusted to accountable employees/officers. While this may not be true to all government agencies, some agencies entrusts the operation of their accounting and finance office to a single person, most often the time with very minimal supervision.
Barnes says, business owners (or government agencies) simply don’t protect themselves enough. Many are too busy or too trusting (or unnecessarily minimizing the cost of human resource at the expense of effective internal controls). This trusting mindset places the company, its employees and its overall success at risk. By recognizing these risks, business owners have the enormous opportunity to create segregation of duties in their accounting departments.
As the founder and CEO of an accounting services company, Barnes identified three main risks that companies face when they lack segregation of duties in accounting, as well as best practices to create and uphold a system of checks and balances to circumvent these risks. These risks are 1) risk of fraud, 2) risk of errors and 3) Risk of Inefficiency.
Increased Risk of Fraud
According to Barnes, one of the biggest risks associated with a lack of segregation in the accounting department is an increased risk of fraud. When one person handles the majority or all of the business finances, there is no oversight to ensure that everything is accurate.
By segregating duties in an accounting department, multiple people are held responsible for the end product. The person inputting payroll isn’t the one reconciling the bank account. Furthermore, having multiple people in the department may be enough of a deterrent to keep employees from attempting fraud in the first place.
Best Practices to Minimize/Avoid Risks of Fraud
Here’s some of the best practices Barnes shared for implementing internal controls against fraud:
1. Bank reconciliations should be done by someone other than the person who is making cash deposits or withdrawals.
2. The person entering bills and preparing checks should be different from the person signing the checks. As well, use pre-numbered checks and have two check signatures required for high-[peso]-value checks.
3. Have an executive team member review and sign off on payroll.
4. Review financials monthly, including a review of the cash flow forecast and the actual costs compared to the budgeted costs.
Increased Risk of Errors
Barnes discusses, another problem that can result from a lack of segregated duties is the increased risk of human error. With only one set of eyes on data entry, analysis and financial reporting, accidental errors may be overlooked. This can be a huge deal, particularly if incorrect reports are filed with financial institutions or government agencies.
Foregoing considered, Barnes recommends the following:
Best Practices to Minimize/Avoid Risks of Error
1. Hire a solid accounting team immediately. Don’t wait until your books are a mess.
2. Delegate as much as you can. Anything that you can pass off to someone else, you should.
3. Reconcile balance sheet accounts on a monthly basis. Everything on the balance sheet should tie to a statement or schedule. If it doesn’t, something is not right.
4. No matter how smart your accounting team is, human error is inevitable. If an error does happen, it’s best to put procedures in place to catch it quickly.
5. Always document expenses. All accounting departments should have a process for how transactions are processed.
Increased Risk of Inefficiency
This risk may appropriately apply to accounting offices with several employees but with no defined specific duties and functions for each employee.
In order for a team to work efficiently, Barnes advises that each employee must be working in a manner that highlights their strengths. This prevents one employee from struggling to complete responsibilities he or she is not prepared for.
Barnes added that assessing employee experience and strengths is a vital step in successfully managing your accounting department. Additionally, a month-end checklist is helpful in creating a list of who is responsible for what. When something doesn’t go as planned, or when someone doesn’t do their job, it makes it much easier to see where the problem is and greatly reduces finger pointing.
Barnes recommends the following steps to assess the experience and strengths of your accounting department and allocate duties accordingly:
1. Sit down with each employee and gain an understanding of what they do daily, weekly and monthly.
2. Draft a list of duties that need to be accomplished monthly. Assign someone on your team to each task along with a due date and a place to initial when the task is completed.
3. Make sure to eliminate any duplicate efforts. Although you want your team to be cross-trained, you don’t want redundancy.
4. Once you have the duties assigned accordingly, make sure each person has a clear understanding of their responsibilities. You want their skill sets to align with the work they are assigned.
5. Draft a job description for each employee. Make sure each person’s job description aligns with what they are doing. Having written job descriptions puts everything on paper and leaves less room for miscommunication of roles and responsibilities.
Read the full text of this article, here.
Source: Forbes.com, “Why You Need to Segregate Duties in Your Accounting Department” written by Jennifer Barnes, Founder and CEO of Optima Office, LLC
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