Segregation of Duties in Small Business
Top 10 SoD controls for Small Business
Small businesses are the lifeblood of economies, often characterized by their agility, close-knit teams, and entrepreneurial spirit. With limited resources, they tend to operate on lean, flexible structures where everyone plays a crucial role. However, the traits that make small businesses nimble can also expose them to significant financial risks. This is where Segregation of Duties (SoD) is a guardian of financial integrity and security.
In this fifth installment of our SoD blog series "Top Ten Segregation of Duties, Google Searches Answered," we discuss Segregation of Duties for small businesses. From its definition to the top ten most important SoD controls for small businesses, we'll unravel the layers of SoD to help small business owners navigate the intricate terrain of internal controls.
Segregation of Duties (SoD): is a critical internal control
that helps prevent fraud and errors by dividing responsibilities
among multiple individuals within an organization.
In small businesses, segregating duties poses a challenge because small businesses often operate with minimal staff, resulting in overlapping responsibilities among employees. When the workforce is limited, it becomes essential to introduce compensating controls, such as the requirement of managerial oversight and approval of key actions to ensure proper internal controls. Below are the key segregation of duties controls for small businesses:
Authorization and Approval: Separate individuals should authorize and approve transactions. For example, the person who requests a purchase should not be the same person who approves it.
Recording and Reconciliation: The responsibility for recording transactions in the accounting system and reconciling accounts (e.g., bank reconciliations) should be divided. This ensures that errors or discrepancies are more likely to be identified.
Custody and Handling of Assets: The custody of physical assets (e.g., cash, inventory) should be separate from those responsible for handling or using those assets. For example, the person who receives cash should not be the same person responsible for depositing it.
Access Controls: Ensure access to sensitive financial systems and data is restricted to authorized individuals only. For example, the individual responsible for payroll should not be able to modify their compensation.
Segregation of Financial Reporting: Different individuals or teams should be responsible for preparing financial statements, reviewing them for accuracy, and approving them for dissemination to stakeholders. This helps prevent bias or manipulation of financial information.
IT Controls: Implement ITGC and ITAC controls to restrict access to systems and data. Ensure that IT administrators cannot change financial records without appropriate oversight.
Inventory Controls: If your small business deals with inventory, separate responsibilities for ordering, receiving, storing, and counting inventory. This can help prevent theft and errors in inventory management.
Vendor and Payment Controls: Divide the responsibilities for vendor management, invoice approval, and payment processing. This helps prevent fraudulent invoices or unauthorized payments.
Expense Approval and Reimbursement: Implement a clear expense approval process and segregate the responsibility for approving expenses from those requesting reimbursement.
Financial Review and Audit: Conduct periodic internal audits or financial reviews by an independent party to ensure compliance with segregation of duties and identify any weaknesses in the system.
Small businesses with limited staff can implement compensating controls to segregate duties, even when resources are constrained. Instead of having dedicated staff for each step in a process, you can assign overlapping responsibilities to a single employee or a small team. This approach involves carefully designing strategies to ensure that checks and balances exist within the workflow. For example, the person responsible for initiating a transaction can be required to obtain approval from a supervisor, and a different employee can be responsible for reconciliation and review. While it's important to maintain a separation of duties, creative compensating controls can help your small businesses manage internal controls effectively and reduce the risk of errors or fraud in your operations.
Adapting these principles to your small business's specific needs and resources is important. While segregation of duties may be challenging for small businesses with limited staff, implementing these controls to the extent possible can help reduce the risk of fraud and errors. Consider seeking guidance from an advisor to tailor these controls to your business's unique circumstances.
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