Segregating Your Accounting Duties: What You Need to Know

The town of Dixon, IL didn’t have $54 million to spare. In fact, year after year, the town barely made its payroll. Its roads went unrepaired. Town workers were laid off.

In 2011, when the town’s acting comptroller discovered a secret bank account belonging to the treasurer, she knew there was a problem. What she couldn’t have realized at the time, however, was that she had just uncovered what is believed to be the largest case of municipal fraud in American history. The treasurer, who was appointed in 1983 and served until her arrest in 2012, pleaded guilty to wire fraud and money laundering and was sentenced to 19 years and seven months in prison. She had embezzled nearly $54 million.

Dixon’s treasurer was able to pull off this massive fraud because the town had poor segregation of duties in its finance department. The lesson? Whether your annual budget is $10,000 or $10 million, all organizations need to segregate accounting duties to reduce their risk of fraud.

For many small nonprofits with limited staffing, implementing proper segregation of duties might seem like a pipe dream. The good news is that it’s easier than you think.

First, what exactly is a “segregation of duties”? Simply put, it involves splitting your organization’s key accounting responsibilities between separate individuals in order to reduce the potential for fraud.

When handling valuable assets, there are four primary duties that should be separated among four separate individuals:

• Authorization. Only one individual should be responsible for authorizing transactions or the use of assets.
• Recording. A second person should be in charge of entering financial transactions into your accounting software.
• Reconciliation. A third person should oversee the comparison of an independent record to your organization’s accounting records.
• Custody. Finally, you’ll want a fourth person to maintain the records.

In practice, this method works well. Take cash receipts, for example. If your organization receives daily donations in the form of mailed checks, you’ll want two people to handle opening the mail. Deposit preparations should be conducted by the individual charged with authorizing the deposit. Another person should be given custody of the checks and the deposit slip—they’ll be responsible for taking it to the bank and making the deposit. Another person will be the one to receive the deposit paperwork and record the transaction in the accounting program. Finally, at the end of the month, a different person will reconcile the bank statement with the organization’s accounting records.

It can be challenging for small nonprofits with limited personnel to spread these duties out. The key is to be creative. Find volunteers you can trust to participate in the process. Draw in willing board members to help out, if necessary. Depending on the size of the nonprofit, it’s not unusual for the board treasurer to assist with recording or reconciling.

If you’re still struggling, it might be beneficial to seek the help of an outside bookkeeper. Depending on your frequency of donations, an outside bookkeeper not only provides an added lay of security, he or she can also act as a neutral third-party who can help with data entry, as well. Plus, bookkeepers tend to be less expensive and can free up your accountant for more important tasks.

While it can be a challenge for a small nonprofit to segregate duties, a little creativity can go a long way. Engaging the help of your staff, board, or an outside bookkeeper, will help you establish strong internal controls and avoid the fate of Dixon, IL.

By Kyle Beltle, CPA
Staff Accountant