Enforcing Financial Integrity – The Importance of Separation of Duties

Financial management is difficult enough in the business world, but when you add the additional layer of complexity with fiduciary accounting (anything that deals with an insured’s money!), it is vital that an agency has processes in place that ensure integrity, accuracy, and security of accounting information. One key principle that plays a pivotal role in achieving these objectives is a separation of duties.  This fundamental concept serves as a cornerstone for establishing robust internal controls within an agency, and helps to safeguard against errors, fraud, and mismanagement.

What is Separation of Duties?

Separation of duties (SoD) is a risk mitigation strategy that involves dividing tasks and responsibilities among different individuals or departments to prevent conflicts of interest and reduce the likelihood of errors or fraudulent activities.  In the context of accounting, this principle helps distribute critical financial processes across multiple roles, creating a system of checks and balances.  

Key Components of Separation of Duties in an agency:

1️⃣ Authorization and approval.  Authorization involves granting access or permission to perform a specific task.  Approval refers to the confirmation or validation of completed tasks or transactions.  Within an agency, examples of authorizations and approvals are an agency owner approving a vendor bill, and a bookkeeper paying.  In addition–and this is unique to insurance agencies–insureds providing their banking or credit card information to be used to process a payment on their behalf at a carrier website, or the agency’s merchant service provider.  This specific example is incredibly important, as those funds are held in trust and should be handled with great care and detail.  Separating these functions ensures that no single individual has the authority to both initiate and approve financial transactions, reducing the risk of unauthorized activities.

2️⃣ Recording and custody.  The recording of financial transactions involves entering data into your accounting or management systems properly; custody pertains to the physical control and handling of assets, especially cash.  Separating these roles prevents individuals from manipulating records for personal gain, as those responsible for custody do not have the ability to alter financial records.  For example, an account manager may upload a payment and print and receipt, but the receptionist or bookkeeper accepts cash from an insured.  

3️⃣ Reconciliation and reporting.  Reconciliation involves comparing financial records to ensure accuracy and identify discrepancies; reporting encompasses the preparation and distribution of financial statements, including bank reconciliation reports.  By assigning these tasks to different individuals or teams, an agency can enhance the reliability of financial information, as errors or discrepancies are more likely to be identified during the reconciliation process.  In our example above–the account manager processes payment to the carrier and the funds from the insured are receipted by the receptionist–the bookkeeper would perform the final reconciliation to ensure all transactions match.

Benefits of Separation of Duties:

👉 Fraud Prevention.  SoD acts as a deterrent to fraud by requiring collusion between multiple individuals to circumvent controls.  Individuals with malicious intent find it challenging to manipulate or exploit the systems when tasks are divided.

👉 Error Detection. The division of responsibilities facilitates cross-checking and validation of financial information.  Errors in recording or processing transactions are more likely to be identified and rectified before they lead to significant financial discrepancies.

👉 Enhances Accountability.  SoD promotes accountability and transparency, as responsibilities are clearly defined.  Each individual involved in the process is accountable for their specific duties, reducing the likelihood of scapegoating or passing the blame.

In the dynamic realm of insurance agency accounting, the separation of duties emerges as a linchpin for establishing effective internal controls, especially for fiduciary funds.  By implementing SoD principles, agency owners can fortify their financial processes, mitigating risks, enhancing accountability, and fostering trust (with employers, carriers, and insureds) in the accuracy, reliability, and proper handling of their financials information and trust funds.  As agencies continue to navigate increasingly complex financial landscapes, the importance of separation of duties remains unwavering.

How can you adjust your internal processes to make sure you have a clear separation of duties?  

About Crystal Temple

Crystal has spent nearly two decades focused exclusively on accounting and bookkeeping for insurance brokers. She has founded multiple bookkeeping groups, one of which was acquired by a prominent AMS provider. Crystal has also served as a controller of an agency group that acquired over 50 agencies in a two-year timeframe. She is the co-founder of a startup called Ricono, building a platform to address some of the technology deficiencies brokers face when trying to measure and manage their financial operations.

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