Double-checking your accounts is more than just good common sense – it’s also a vital way of reducing the risk of both mistakes and fraud.
The individual who submits an expense claim should not be the same person that pays it. This is what is meant by segregation of duties – no single individual should have sole responsibility for any single transaction.
The best way to prevent this is to insist on dual authorisation. Without this simple check, staff could submit fraudulent expense or petty cash claims that might be paid without question if not checked by a second party.
Similarly, if one person is allowed to open the charity’s post alone, they could potentially misappropriate cash received or amend cheques for their own benefit.
Finally, if one person has sole responsibility for making payments from the charity’s bank account, there would be nothing to stop them making transfers to their personal account.
Despite the obvious need for dual authorisation, charities often skimp on double checks due to a lack of finance staff.
But the truth is these duties can be performed by someone who is not a full-time member of the charity’s finance staff. It can even be seen as desirable that the authoriser be a non-finance member of staff, as they would be likely to maintain a higher level of independence.
In particular, non-finance staff could take responsibility for opening mail, recording and banking income, and countersigning expense and petty cash claims. They can also double-check bank reconciliations (ensuring that the bank statements match deposits in and payments out).
These tasks require little training, as staff undertaking the responsibilities need only to follow guidelines set by the charity.
To work properly, the dual authorisation process must be governed by agreed guidelines. For example, a level should be set – for example £5,000 – at which a one-off item of expenditure must be countersigned by a trustee.
Smaller expenses could be countersigned by a member of the management team, but payments should always require two signatories or authorisations.
In smaller charities with fewer staff, trustees are likely to be asked to authorise payments on a more regular basis.
The segregation of duties is not a perfect firewall against fraud, as staff who are bent on defrauding the organisation could conspire together.
A regular rotation of duties between staff can reduce this risk, but the potential benefit should be weighed against the fact that it could also cause unnecessary disruption.
Dual authorisation and the segregation of duties are simple in principle, but through their careful application a charity can do much to reduce the risk of costly errors or even deliberate misappropriation.
When built into the charity’s financial processes and internal controls, they offer an efficient and easy way to ensure that the charity’s income goes as far as possible.
Jonathan Lachmann is a senior manager at the accountancy firm HW Fisher & Company