Cash segregation of duties is a tactic to reduce the risk of accidental and intentional money loss by employees. The person most likely to steal cash from a company is a long-term employee in a work environment that lacks segregation of duties. Cash segregation of duties is most common in larger corporations, but small businesses also can benefit from minimal segregation of duties or having a manager thoroughly oversee and review the cash duties. Proper segregation of duties in a cash business requires authorization, custody, recording and reconciliation.
Authorization is the first step in the chain of custody. Only one person is authorized to perform a duty. For example, a person can receive mail and checks, but he should not retain the checks in his custody, record them or reconcile the ledger on which the checks were entered. Additionally, he can authorize or prepare deposits, but he cannot go to the bank to deposit the money. Sometimes, in a smaller business, the person who authorizes a check can reconcile it only if another employee or manager deposited and recorded it.
The length of custody depends on the duty. For example, a cashier handling money for an eight-hour shift in most cases should not reconcile her own cash drawer. It would be acceptable for her to count and record her end-of-day totals, but a superior should reconcile the totals to verify the cash against receipts. This ensures that all money is accounted for and none is missing.
Recording is the cash duty that requires a manager or employee to physically or electronically record a cash total on the company's accounting books. This cash duty ensures a paper trail that follows the money. In our previous example, the manager who reconciled the cash drawer should get another manager to record the cash for deposit or cash on hand. When multiple people are handling cash, it is essential to segregate duties throughout the chain of custody.
Reconciliation is the final step in the segregation of cash duties and chain of custody. It ensures that everyone who handled the money accounted for the cash, checks or deposits correctly. When a manager or employee reconciles the cash totals for the day or week, it provides an opportunity for the business to catch any errors in accounting or discover potential internal theft. The business should always have a different person reconcile than the one who received, handled or recorded the money.