Segregation of Duties for Small business Bookkeeping

Once your small business grows and you devote more time as well as effort into developing it, the sad reality is that you’ve got more to lose because of mistakes, dishonestly, and fraud. This is certainly of distinct importance with accounting and bookkeeping since they deal with controlling and tracking cash that comes in and goes out of your company. For instance, an unethical and experienced bookkeeper who was entirely responsible for all aspects of the bookkeeping for your small business could very easily rob money from your business and cover it up.

We know that as the boss, you like to think that you’ve got a keen eye on all parts of your business, but even the most thorough owners can’t possibly watch everything like a eagle at all times once their business reaches a decent size. So, how can you minimize the chance of errors or theft as your small business grows? Segregation of duties is an incredibly important concept which can accomplish that, and must be effectively applied in any company.

What is Segregation of Duties? To put it simply, it means structuring the standard tasks of your small business in a way that multiple people are required to complete it. A basic example of this is having two individuals required to sign checks. This greatly reduces the chance that a signer on the business bank account will write bogus checks to launder funds out of the business, because he or she knows the other person will see and sign every check the other person writes.

Having two or more people needed to complete any job regarding business finances has been proven to substantially lessen the incidence of both mistakes and dishonesty. Hopefully it makes sense why this is the case. With multiple people being required to complete a task, there will be more than one set of eyes to notice potential errors or fraud. Moreover, any kind of fraud will require collusion between two or more employees, which is far less likely to occur than if a single person could get away with it on their own.

As any small business evolves and the volume of staff increases beyond just the owner, Segregation of duties for bookkeeping tasks is incredibly important. The “rule of two” is a good starting point. What this means is that any task involving the finances of your small business should require multiple people to complete. Here are some examples:

The bookkeeper prints checks to pay vendors, and the CEO signs and sends them out.

The assistant photocopies checks from customers and gives them to the bookkeeper to record, then the assistant completes the bank deposit

Bookkeeper #1 records all receipts, and Bookkeeper #2 reconciles all accounts to verify whats recorded in the books actually matches what happened in reality (as shown on the bank statements)

The bookkeeper creates all staff paychecks in Quickbooks, then the owner reviews them and gives them to the payroll company to get prepared.

The bookkeeper runs financial statements to give to your bank, and the owner approves them then actually hands them over.

By now you should get the idea. It’s not an exceedingly complicated concept, but I’m certain you now realize why it’s incredibly important.

Another component of segregation of duties is that it protects employees such as the bookkeeper in addition to protecting the owner. If a bookkeeper’s duties are effectively segregated, he or she is protected against accusations of fraud, because he or she will literally incapable of embezzlement, for example. When your professional reputation is on the line, it’s extremely important that controls exist to protect against false accusations of fraud against you.

Dishonestly in the workplace is an unpleasant issue to acknowledge and deal with, but there a realities in the world that all small business owners must be prepared to deal with in order to be successful, and effective segregation of duties is imperative in order to protect you, your employees, and your small business.

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