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Utah Charter Schools Teaching Moment: Separation of Duties in Internal Controls

Larson & Company is proud to announce a new series of educational accounting posts created especially for the Utah Charter School community. The title of this piece probably didn’t send tingles of excitement up and down your spine. We wouldn’t expect it to. It’s likely that the only time you hear the words “internal control” or “separation of duties” is when your auditor rolls into town, or in a training here and there. To be honest, excitement probably isn’t what you think of when the auditor shows up. We are auditors and we are not offended – it’s just reality.

 

Simply put, internal controls are procedures put in place in an accounting system that reduce the risk that something goes wrong. The “something” that goes wrong might be intentional or unintentional. Items that are intentional are usually referred to as fraud. Items that are unintentional are just mistakes. Good internal controls are designed to reduce the risk of either one. Good internal controls can also minimize the anxiety you might feel when your auditor arrives to examine your financial statements.

 

One component of a good set of internal controls is the proper separation of duties. This means that accounting duties are split up among two or more people. This is so that the same person cannot steal something and then hide the evidence by making adjustments in the records (sometimes called “cooking the books”). There are three basic functions that should be separated: custody, authority and record keeping. A quick illustration of what this means can be shown in terms of writing checks. Custody would refer to someone’s access to the blank checks. Authority would refer to the person who can sign the checks. Record keeping is the person who records the transactions in the accounting software. In a perfect world, no one person should have more than one of these duties.

Here’s a quick example of what could happen in a very simplistic scenario. An accounting clerk collects cash for the payment of a fee, prints out a receipt from the software and gives a copy to the customer. The clerk then fills out the deposit slip for the day, takes the money to the bank, and comes back and records the transaction in the school’s accounting software and then performs the bank reconciliation at the end of the month. Here the clerk has the ability to pocket the cash and then adjust the records in the software to make it appear that all is good and well. By having these duties separated, the clerk would not be able to steal the money without someone else knowing that it happened.

 

In our imperfect world, staff sizes are often too small to properly separate all duties that should be separated. Having these controls in place is all about protection. First, it protects the public’s assets. Second, it protects YOU! It protects you from potential false accusations. It also protects you from the temptation to do something you ordinarily wouldn’t. Fraud is most often committed by someone that you’d never expect.  .

 

So if you find yourself in a smaller organization that does not have the luxury of several accounting staff members, here are some things you might consider:

1) ask that a board member provide some oversight, or some other assistance that would provide another level of “checks and balances”

2) see if another staff member from another department and fill certain roles, or

3) hire a third party to fill some of the more critical roles.

 

We’ve only scratched the surface on this subject. Larson & Company’s charter school team would be happy to sit down with your organization and consider how your specific system could be structured to minimize your risks. Contact Russell Olsen today for more information.