In addition to the “tone at the top,” an important part of having an effective internal control is segregation of duties. Adequate segregation of duties requires certain key functions to be performed by different employees. The following activities should be separated to the extent possible:
- Authorization of transactions
- Custody of assets
- Record keeping
- Reconciliation of accounts
To strengthen overall internal controls, this separation of duties should be applied to the organization’s primary business cycles – cash receipts and disbursements, accounts receivable and revenue, purchasing, and payroll cycles. Here are some examples of each:
Cash: An employee responsible for receiving cash payments should not also record cash receipts.
Accounts Receivable: An employee that authorizes credit memos should not also record these transactions or have access to customer receipts.
Purchasing: An employee that is in charge of making purchases should not also receive purchases or approve invoices.
Payroll: An employee that authorizes payroll should not also distribute checks or have access to make unapproved changes to employee files.
Understandably, proper segregation of duties can be difficult to implement when an organization has a limited number of employees. In these cases, when segregation of duties is not possible, compensating controls can be effective. An example of a compensating control would be designating an employee or board member with oversight responsibilities to review or monitor certain activities where separation is not feasible.
While reviewing internal controls, credit card policies should also be considered. Best practices for credit card policies include: restricting access to few employees, specifying business use only, obtaining receipts for all charges, and having a board member or an employee at the same or higher level review and approve the charges and receipts.
Even well-designed controls are only effective when adhered to and applied in all instances. The tone at the top or attitude of board members and management can have a vital impact on effective internal control. Therefore, it is important that the monitoring of these procedures and review of related policies are conducted regularly as the organization, staff members, and board members change.