How not-for-profits can evaluate segregation of duties during the continuing “Great Resignation”

Early 2021 started the “Great Resignation”, an ongoing economic trend in which employees voluntarily resigned from their jobs in masses. According to the U.S. Department of Labor, between 4.1 and 4.5 million employees quit their job each month through September 2022, and estimated totals for 2022 will surpass the 47.4 million people who quit their jobs in 2021. While these vacancies are being felt across all organizations, not-for-profits have been hard hit with lacking manpower resulting in stretched team members, both paid and volunteers, and fewer services delivered. With employees and volunteers taking on additional responsibilities, nonprofits should evaluate segregation of duties (SOD) around key processes to ensure effective operations.

Segregation of duties is a fundamental element of internal controls, which requires more than one person to complete certain key duties to prevent fraud and errors. There are four types of functions under the concept of segregation of duties:

1. Authorization
2. Custody
3. Record keeping
4. Reconciliation

The ideal work environment would prevent one person from handling more than one type of function for any process. Utilizing volunteers and/or board members is a viable option for not-for-profits with limited staff. They can play a key missing role, such as being a check signer, second count for a deposit, or assist with a reconciliation. Talk with your board members and volunteers on the roles you might need and see if they have the background/capabilities to help. Addressing SOD shortfalls as soon as possible will help not-for profits maintain the transparency and the integrity that donors are looking for.

Risks

Potential risks to a not-for-profit with a lack of segregation of duties includes:

• Fraud – A single employee performing all functions within a process leaves no oversight and gives opportunity to commit fraud undetected.
• Errors – Little oversight of a process means errors are not detected timely.
• Inefficiency – Involving multiple employees in a process allows tasks to be allocated giving individuals time to focus on other tasks across multiple areas.

These risks can cause significant damage to an organization such as fraudulent payments, inaccurate financial statements, or delayed month-end close.