Preventing Fraud from Within- Part I

John J. Kasperek, President, recently gave seminar at the Missouri Athletic Club on preventing fraud against small business.  Here is Part One of his remarks:


Do you have internal controls within your business to prevent fraud?

The best means to implement Separation Of Duties in your business.


A. Separation Of Duties- Concept

The concept is to assign tasks to more than one person to prevent fraud and error.

The objective is for no one individual to control a process from start to finish.

With good separation of duties, it is expected that at least one person involved in a process will identify

and/or prevent the processing  the of  a transaction containing  fraud or error initiated by another person.

SoD is checks and balances on upon the actions of individuals.

Also known as “segregation of duties”, it is a powerful internal control for all businesses, regardless of size.

SoD is well known in accounting circles systems from risks understood over hundreds of years of practice.


B. “ABCs” of Separation of Duties- Accounting Perspective

No one person is assigned job functions in more than one of the following three categories of duties:


·   Asset handling and disposition

1)      Duties include having physical access to Company assets or being in a position to control where an asset is directed.

2)      Assets include cash, supplies, equipment, and forms such as vendor & payroll checks, purchase orders, invoices.

3)      To control where an asset is directed involves initiating a payment for/from vendor, employee  payroll, customer; setting up a new customer, vendor, or employee file;  invoicing to/from or adjusting a customer or vendor account; placing an order for supplies, equipment or services and specifying delivery instructions; distributing checks or deposits, on-line or off- line banking or credit card transactions;


·  Booking  transactions to the general ledger, subsidiary ledgers, and journals.

 1)      Duties include booking (or recording, posting) a financial transaction in a general ledger.

2)      Most financial transactions are recorded in subsidiary ledgers that flow to a general ledger with details of day-to-day transactions for accounts receivable, accounts payable, payroll or inventory and fixed assets.

3)      Details of day-to-day transactions include customer invoicing and cash deposits, vendor purchases and payments, Gross-to-net breakdowns of payroll checks, list of inventory or equipment.


  • Comparison or review of transactions or balances.

1)      Duties include reviewing transactions appearing in the general ledger for validity and reasonableness.

2)      Reviewing & comparing transactions to supporting independent records or documentation, such as employee time cards, vendor invoices, customer statements, credit card or deposit slips.

3)      Reconciling bank accounts or credit card statements.


In the next blog with Part Two of his remarks, John J. Kasperek will outline how the concept of Separation Of Duties applies to Information Technology Issues in small businesses. He will also provide examples of fraud he has seen in 25 years of service to small business.