When one person controls multiple phases of accounting transactions (i.e. accounts payable, payroll, accounts receivable, etc.), the opportunity for fraud in the workplace significantly increases.
By involving at least one other person in the transaction, the risk of fraud can be greatly reduced. According to the Association of Certified Fraud Examiner’s Report to the Nation, the presence of anti-fraud controls such as segregation of duties are associated with reduced fraud losses.
Accounting processes are divided into three separate phases:
- Authorization (requires an employee to direct another employee to initiate a transaction)
- Custody (the actual possession of the asset)
- Recording (adjusting accounts to reflect the transaction within the accounting records)
The “ARC” duties should be se segregated so an employee doesn’t have responsibility for more than one phase (authorization, custody and/or recording) within an accounting process.