We are all familiar with the saying, “If you want something done right, do it yourself.” Although this saying can be true for many things, it does not apply to the preparing, approving, and posting of journal entries in a general ledger. Where at all possible, you want to ensure that these duties or responsibilities are separated amongst different individuals at your organization. Said simply, separation of duties is having more than one person involved in completing a task to reduce the risk of error or fraud from occurring. Proper separation of duties is the foundation of effective internal control at your organization.
The concept of proper separation of duties is simple to understand but sometimes complicated to put into practice for a variety of reasons. Your accounting software may not be able to separate all of the duties or it doesn’t leave a sufficient enough audit trail of who prepares, approves, and posts journal entries. Perhaps you are a small organization and you are limited by the number of people available to delegate these duties.
Included below are best practices that you can implement today to ensure the internal controls related to your organization’s journal entry process are in place and appropriate for your size organization.
- Compile a list of everyone that has the ability to prepare, approve, and post journal entries in your organization’s accounting software. This may entail working with Information Technology to obtain a complete list based on user access rights. Remember that this is not a list of who performs these functions currently, you need to know who has the capability to perform any of these functions.
- Using the permission settings within your accounting software, have your system administrator restrict user access to only include the functions for which they are responsible. Consider restricting access to the general ledger accounts that they have the ability to prepare, approve, and post journal entries to.
- If proper separation of duties is not possible due to limited staff, have the Superintendent or a board member review a report of journal entries posted at least weekly or monthly. It would be preferable for this reviewer to have knowledge of school business, double-entry accounting, debit, and credits.
- Journal entries should be supported by appropriate documentation. Good documentation serves as an important accounting record and facilitates future review (i.e. external audit) to verify and confirm past adjustments.
Consequence of not having adequate internal controls around journal entries can be severe. The financial statements could be misstated and not detected in a timely manner or worse, this weakness could be identified by someone to commit fraud against the organization.
Whitley Penn contributes to the TASBO Internal Control Tips at www.tasbo.org/IC-Tips