Segregation of Duties Is Key to Non-Profit Accounting Practices

by Danielle Bloom

2 min read

Fraud, embezzlement, and theft are all serious threats to your non-profit, which is why putting the proper internal controls in place is essential. One of the most important internal controls is segregating duties, meaning that you have various employees handling the non-profit’s funds and accounting documents. This simple safeguard can make all the difference in preventing fraud. By putting an extra set of eyes on payments and other documents, you also reduce the likelihood of errors.

How Segregation of Duties Works

Segregation of duties ensures that one employee isn’t the only person handling invoices and making payments. Setting up this internal control doesn’t take much time, and all it requires is that you assign at least one more employee to the payment process. Here’s an example of how the process can work with two employees:

  1. An administrative assistant receives an invoice and verifies it with the department or person that made the purchase. It’s best to have the purchaser sign the invoice to confirm that he authorized it.
  2. The administrative assistant writes an un-signed check for the payment amount and enters the information into your company’s accounting ledger.
  3. A manager looks at the invoice and signs the check.
  4. The administrative assistant mails the check, puts a “paid” stamp on the invoice, and includes either a copy of the check or the check number with the invoice before filing it.

Segregation of Duties for Online Transactions

Considering the convenience of online payments, your non-profit should also implement segregation of duties for these types of transactions. The simplest way to handle this is requiring at least two authorization codes to submit an online payment. Each employee involved in the payment has an authorization code, and each of them reviews the transaction before approving it.

Avoiding Slowdowns

The only drawback of segregation of duties is a slight reduction in productivity at your office, since you have at least two employees who need to review transactions instead of one. This is a small price to pay for fraud prevention, and you can limit productivity loss by excluding certain payments from this measure. For expenses that cost your non-profit the same amount every month, such as rent, you don’t need two employees to authorize the payment. You can allow one employee to handle payments for these expenses, or save even more time by setting up automatic payments.

Additional Measures

Keep in mind that segregation of duties is only one type of fraud prevention, and it’s far more effective when combined with other measures. Make sure another employee is reviewing banking statements every month to catch anything that slips through the cracks. You may also want to consider an internal auditor to find potential weak points in your fraud prevention system. As unfortunate as it is, employees commit over 40 percent of fraud, so your non-profit needs the right strategy to guard against this. Segregation of duties is an excellent line of defense that you should implement immediately to prevent fraud.

References & Resources

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