Three Automations to Improve Duty Separation

Most small businesses struggle to maintain adequate separation of duties in their accounting functions due to their limited staff. Often only one or two people handle all the accounting and treasury tasks of the business, with little to no oversight. This leads to situations where the same person could commit and conceal fraud or make significant errors that go undetected. Fortunately, affordable automation tools are now available that provide small businesses with solutions to mitigate such concerns.

The separation of duties (SoD) principle is an internal control that recommends that the bookkeeping, custody, and authorization aspects of a business transaction be handled by different staff members. But this involves a minimum of three employees working in an accounting department of any given business, which often isn’t realistic for smaller companies.

THE RESOURCES DILEMMA

Small businesses are characterized by tight budgets, lean operations, and limited resources. Therefore, internal controls are often an afterthought, as employees wear multiple hats to get things done. The challenges of hiring and retaining employees since the COVID-19 pandemic are making it worse.

Without proper checks and balances, mistakes can easily go unnoticed, and dishonest employees may take advantage of the situation. As a result, the same person can:

1. Set up a new vendor in the accounting system (including, name, address, or payment information).

2. Record the invoice charges and description.

3. Issue and authorize payment.

4. Reconcile bank statements.

This clearly goes against SoD principles, making smaller companies more susceptible to fraud. According to the Association of Certified Fraud Examiners (ACFE), the lack of internal controls, such as SoD, accounts for one third of fraud committed. Small businesses are the most vulnerable, with 43% lacking proper internal controls and 60% never recovering their losses from fraud (see the ACFE’s 2020 Report to the Nations).

AFFORDABLE AUTOMATIONS TO CONSIDER

With the help of technology, small businesses can now better mitigate these risks. Accounting automation tools now provide built-in checks, balances, and audit trails at affordable rates for small businesses. Though only one or two people will continue doing the bulk of the accounting functions, business leaders and owners can have greater transaction visibility during the approval and review process of accounting transactions. The following are three automations that can help small businesses mitigate risks associated even without proper SoD and optimize their business processes at the same time.

1. To ensure SoD in the accounts receivable process, the employee creating and sending the customer invoice should be different from the employee collecting and recording the payment for that invoice. Whenever those tasks are handled by only one person, automation software should be implemented.

Accounts receivable automation software streamlines invoicing and payment collection. Invoices can be automatically generated and sent to customers as soon as the sales process is completed. Due dates and payment reminders are also sent automatically. Payments from customers are matched to the transactions received by the system, with often no manual input needed from accounting staff. System audit trails are available in case auditors or business managers want to review manual overrides.

2. To ensure SoD in the expense reporting process, the employee requesting the expense reimbursement should be different from the employee recording and disbursing the respective payment. Whenever those tasks are handled by only one person, automation software should be implemented.

Expense reporting tools allow all employees to submit their own expense reports directly into the system, along with the appropriate receipt. These expenses are then reviewed by their managers and disbursed to their preferred method of payment, with little to no intervention from accounting staff.

3. Accounts payable automation software works almost the same as expense reporting tools, with the added benefits of validating vendor charges, reducing the risk of duplicate payments, and taking advantage of early payment discounts. 

Beyond error and fraud prevention, the insights businesses get after automating routine accounting tasks are phenomenal in terms of transparency and timeliness of relevant information. Invoice exception rate, early payment discounts captured, and late payments rate and penalties are just a few key performance indicators that can be effectively tracked through an accounts payable automation tool.

ACTIONABLE STEPS FOR IMPLEMENTATION

Finding the right accounting automation tools is just the first step; the next and equally critical step is implementation. Many underestimate the amount of planning involved at that stage, resulting in missed opportunities to maximize the tools’ benefits. Small businesses with limited IT resources should consider the following tips as they embark on their automation journey.

1. Start with a thorough assessment. Existing processes, workflows, and challenges should be thoroughly assessed before starting any search for process improvement tools. Ideally, the desired SoD should be mapped out among existing staff, managers, and leaders so that the search for an adequate tool is effective.

2. Leverage current resources. If the business already has an accounting system, look for automation solutions that easily integrate with it. For example, well-known small business accounting systems, such as QuickBooks and Sage, have app marketplaces that list several resources that integrate seamlessly with their core accounting systems. These integrations usually allow for automatically syncing data between systems and reducing the need for repetitive manual entries.

3. Add structure early. Determine the main objectives and budget and establish a well-defined selection process that has questionnaires that all vendors must complete. Having a predefined list of items that should be covered during the demos is also helpful.

4. Recruit adequate help. Consider which efforts will be led in-house vs. external consultants. Hiring temporary staff to assist during implementation is often beneficial.

5. Make room for potential difficulties. Add some buffers to your project timeline and budget. There’s always something that may go wrong when implementing a new tool. But with proper planning, implementing such helpful technology shouldn’t be painful.