Internal financial control is one of the best practices that serve the purpose of accuracy, integrity, and credibility of the financial system in an organization. It refers to measures put in place to protect and maintain the value of the company’s properties alongside preventing and discouraging fraud and developing ways and means through which the company can be compliant with the regulations of the country. The first major element of internal financial control that can be identified is the separation of duties. Qualified staff is then responsible for reviewing other employees’ reports as this practice is crucial in the prevention of embezzlement of organizational funds, and fraud among others.
What is meant by segregation of duties?
The inability to separate duties is a major vice in internal financial control. It employs the separation of duties of financial activities where no person shall have authority on an entire financial activity. Since all these responsibilities are divided, then there is the likelihood of minimizing mistakes, frauds and embezzlements. In other words, segregation means no one person signs off on a transaction and then controls the record or physical possession of the associated asset.
For instance, one employee was in charge of approving the payments, and another would log the payments in the system. Such division of labor contributes to effective monitoring and evaluating of the activities thereby reducing the extent to which the activities may be mishandled or prone to fraud.
How segregation of duties helps prevent financial mismanagement
1. Reduces the Risk of Fraud
The main advantage of the segregation of duties within internal financial control is its effectiveness in minimizing fraud risk. Especially when an individual has complete control over a financial process it is not difficult for this person to alter the figures or embezzle money. When the responsibility is shared among various employees, they will not afford the other a chance to perpetrate fraud due to supervision. For instance, if the department head is in charge of approving payments, and the accounts department is in charge of making payments, then fraud is made more conspicuous.
2. Provides Quality of Financial Information and Records
In a nutshell, internal financial control most especially the principle of segregation of duties guarantees the accuracy of the records. Wherever duties are differentiated, risks of errors and fraud in financial reporting will be considerably reduced. For instance, while one employee is responsible for the approval of expenses, another employee can enter them into the accounting system reducing the chances of a repeat of the transaction. This lowers the chances of errors slipping through that could make the financial data unreliable, in that, the information is credible.
3. Enhances Accountability
Other benefits of segregation of duties include segregation, accountability also improvement in an organization. It is easier to have accountability if and when several persons are involved in the financial process to track the one involved in the particular action. This assists in creating an environment that increases each employee’s awareness of the accountability they have for the stewardship of the organization’s funds. This is because when one is held accountable for certain tasks, he or she is less likely to be negligent or make mistakes when completing his or her work in addition accountability ensures that employees strictly adhere to laid down procedures.
4. Prevents Misappropriation of Assets
Internal financial control systems that include segregation of duties help prevent the misappropriation of assets. When one person is solely responsible for both handling and recording assets, there is a risk that they may steal or misappropriate funds. However, by assigning different individuals to these tasks, the chances of asset mismanagement are reduced. For example, one person might handle the physical cash, while another person records the cash transactions. This reduces the opportunity for one person to take assets without detection.
5. Improves Compliance
Duty separation also aids in making sure that organizations stick to the financial regulations required by any organization. To conform to the rules and regulations set by the regulatory authorities, organizations should divide their financial responsibilities. From this consideration, the segregation that creates checks and balances protects financial transactions from unlawful conduct that may attract fines or legal consequences.
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