Nonprofit Fraud- The Importance of Segregation of Duties
By Jake Cranfield, CPA, HoganTaylor Assurance Senior
Proper segregation of duties is essential to all organizations, and can be one of the most important measures taken to prevent fraud. Setting up processes to include more than one person will ensure that there are multiple opportunities to prevent fraud, which are extremely important to organizational success.
Segregation of duties tends to be a weak area for organizations that are smaller in staff numbers, as they have a hard time distributing the duties amongst a limited number of people. However, these checks and balances are crucial to the longevity of the organizations and should not be overlooked.
One of the most common occurrences of improper segregation is when one person approves an invoice and signs the checks for payment. CFOs and Controllers are often individuals who approve invoices and have single signature authority on checks. In this situation, the individual carries a significant amount of control with little accountability. If dual-signature authority is not an option for the organization, an alternative would be to ensure that the individual signing checks does not also approve the invoices for payment. When these duties are separated from one another it gives employees of the organization the opportunity to question payments that appear unusual.
Another area of concern is the mismanagement of company credit cards, as purchases can be made without prior approval. Company credit cards are the easiest way for individuals to make personal purchases in attempt to make them appear as legitimate business expenditures. Furthermore, it is particularly sensitive to organizations who give a high level of authority to a Founder or key member of management. When it comes to reimbursement and payment of credit card expenses, it is essential to have another staff person reconcile the credit card statement with the expense report, or require that receipts be presented for approval. This may seem unnecessary, but provides accountability for those individuals who do not need to obtain prior purchase approval; if they are the ones.
If organizations are finding it difficult to implement segregation of duties, it is critically important that effective compensating controls be put in place to mitigate the risk of fraud. This is where a financially competent board of directors plays a large role within the organization. The organization should be constructed in a manner that provides for two things: adequate governance by the executive team and effective oversight by the board of directors. The board should be reviewing monthly financial statements, and inquire of anything that looks unusual or out of the ordinary. Monthly board meetings are also a great opportunity for review of purchases made by executive management, as well as invoices that are approved and paid by the same individual. This will ensure that the organization is being fiscally responsible and mitigating the opportunities of employees to commit fraud.