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Fraud Prevention Part 2

Segregation of Duties and Authorization Controls 

 

Segregation of duties (SoD) and authorization controls are fundamental pillars of fraud prevention. They involve dividing responsibilities among employees and requiring approvals for key transactions. For a retail business like The Daily Grind, these controls are crucial for minimizing the risk of fraud and errors.

Segregation of Duties

SoD is the practice of dividing financial tasks among different individuals to prevent any single person from having too much control over a transaction. This reduces the opportunity for fraud and increases the likelihood that errors will be detected.

Here’s how The Daily Grind can implement SoD:

• Cash Handling: The employee who rings up sales should not be the same employee who reconciles the cash drawer at the end of the day. At The Daily Grind, baristas handle sales transactions, while shift supervisors reconcile the cash drawers.
• Inventory Management: The person who orders coffee beans and supplies should not be the same person who receives them. Bob Rodriguez, the Operations Manager, handles ordering, while different store employees receive and verify the deliveries.
• Accounting Functions: Carol Davis, the Finance Manager, handles the bookkeeping and financial reporting. This is separate from the cash handling and inventory management duties performed by other staff.

Authorization Controls

Authorization controls require that specific transactions or actions be approved by a designated person. This adds another layer of oversight and helps prevent unauthorized or inappropriate activities.

Here’s how The Daily Grind uses authorization controls:

• Purchasing: Any purchase of equipment or supplies above a certain amount must be approved by Alice Chen, the Owner/CEO.
• Discounts and Voids: Discounts or voids exceeding a certain percentage of the sale require a manager’s authorization. Shift supervisors at The Daily Grind are authorized to approve small discounts, but larger ones require David Lee's approval.
• Payroll: Payroll processing and any changes to employee pay rates must be approved by Carol Davis.

Case Study: Preventing Prolonged Theft at The Daily Grind

David, a barista at The Daily Grind, was stealing small amounts of cash each day. He was responsible for both ringing up sales and reconciling the cash drawer, which allowed him to manipulate the records.

However, The Daily Grind implemented SoD, assigning cash reconciliation to shift supervisors. The supervisors started noticing small discrepancies at the end of each day. By segregating the duties, the company was able to identify that there was a problem. This led to the discovery of David's theft. Segregation of duties did not prevent the theft, but it led to discovering the theft much earlier than it otherwise would have been.

Conclusion

By implementing segregation of duties and authorization controls, The Daily Grind can create a more secure and transparent financial environment. These controls not only help in detecting and preventing fraud but also ensure the accuracy and reliability of financial transactions. This, in turn, fosters trust and confidence among stakeholders, contributing to the long-term success and sustainability of the business. Remember, every business is unique. It is important to seek professional advice to tailor these practices to your specific needs.