A well-designed internal control environment ensures that the key responsibilities of authorization, custody, record-keeping and account reconciliations are held by different individuals, a bedrock principle called Segregation of Duties. Involving unique people for each of these functions guards against errors and the misappropriation of assets. While the pursuit of efficiency suggests having an individual do more than one of these tasks, the possibility of wrong-doing is unacceptably high. Conversely, having too many controls increases costs that yield no greater protection. Hence, a properly designed internal control environment balances efficiency with expensive controls. While this is what “best practices” tell us, reality is messier. How can a small non-profit design a robust internal control environment when there may not be four people in the accounting department to allocate these tasks?
Segregation of Duties can be accomplished in many ways. In small organizations where there may only be two people in the accounting department, tasks like authorization and custody can be performed by employees in other departments since record-keeping and account reconciliations are almost always performed within the accounting department. In the earliest stage of formation, an organization may even have “working” board members who perform tasks. However, this configuration itself is problematic since board members, charged with governance and oversight, would be overseeing their own work. Over time, tasks performed by a board member should transition to staff to preserve the board’s role of independent oversight.
Has your organization achieved a healthy balance between controls and efficiency? Let’s have a conversation!
In Part 2 of Internal Controls, we will look at the factors that make up a strong internal control environment.