A Guide to Segregation of Duties for Independent Schools

Segregation of duties is an important matter for all organizations, and private schools are no exception. The last thing a school wants is to have to explain a significant internal control weakness to a board, donors, and/or parents. Ensuring appropriate internal controls are in place minimizes the risk of fraud, but beyond this, sufficient segregation of duties also reduces the likelihood of employees making errors that could have a material impact on the school’s financial statements. 

While having robust segregation of duties is unquestionably important, it’s an area many independent schools may consider a “blind spot”. The sophistication of an independent school’s segregation of duties processes is largely dependent on the resources of its accounting department. Many independent schools operate with a limited number of accounting staff. As your school continues to grow and the complexities of accounting concepts and treatment continue to become more cumbersome and advanced, it’s easy to see how challenges and risks can arise. 

In this overview, we:

1. Explore the importance of segregation of duties for independent schools. 
2. Outline challenges and common misconceptions that schools tend to have, and
3. Share a series of best practices that independent schools can adopt to strengthen the accuracy of their accounting department.  

The Importance of Segregation of Duties for Independent Schools

Segregation of duties refers to a series of internal control measures that an organization has in place to allow for sufficient checks and balances between individuals tasked with entering, processing, and reviewing information within the financial system. 

In a large organization that deals with high volume and highly complex transactions, internal controls tend to be very sophisticated. Generally these larger organizations have multiple personnel involved in the processing and approval of any given transaction. 

However, in an independent school, segregation of duties is often far less diverse. An independent school may only have a staff accountant and a controller on staff, rather than a comprehensive accounting department with individuals responsible for each financial statement area (Accounts Payable, Accounts Receivable, and so on).

Ensuring that multiple people are involved in the processing and approval of financial information is important for a wide variety of reasons. It can help prevent fraud, ensuring that no one individual has unilateral control over any element of the organization’s finances. Additionally, a well-diversified accounting department with properly segregated responsibilities will allow the organization to have the best chance at detecting and preventing fraud, but more commonly will prevent simple human errors from making it through the accounting system undetected. 

Lastly (and perhaps most importantly), when the independent school is soliciting contributions from donors and utilizing tuition revenues from parents who send their students to the school, it could be detrimental to the school’s reputation and image if there was ever an instance (or question of an instance, for that matter) surrounding the adequacy of the schools accounting department. For these reasons, we recommend making sure a strong internal control structure is in place. 

Common Segregation of Duties Challenges for Independent Schools

Independent schools face a variety of challenges when it comes to ensuring sufficient segregation of duties. 

Many schools typically lack the resources to invest in fully staffing an experienced accounting team. School budgets often prioritize advancement and programmatic endeavors, which puts administrative teams in a bind that ultimately force concessions to be made from an administrative personnel standpoint. Obviously programmatic endeavors should be a significant portion of the annual budget, but oftentimes there is a noticeable inequity between programmatic and administrative priorities that may need to be considered. 

Many independent schools also have vacant positions that they are looking to fill, but are struggling to find people to fill these roles. This is related to the current hiring challenges in the accounting industry, which is experiencing a significant shortage of qualified professionals. 

This lack of resources leads to many accounting teams at independent schools being stretched thin. This results in one person generally handling multiple stages of a workflow that should ideally be split between multiple team members. While this creates an environment that’s vulnerable to fraud, it also results in simple mistakes such as transposition errors going unnoticed until the organization is audited. 

Auditors often discover significant internal control failings during the proceedings of an audit. While being made aware of these control issues is valuable to an independent school, it should be noted that the purpose of an audit is not to identify control matters, and school governance should not consider an audit to be a component of their organization’s internal control structure. 

Best Practices for Segregation of Duties

It can be challenging for independent schools to effectively address segregation of duties issues. However, with the right approach and qualified guidance, organizations of all sizes can build a robust internal control system that protects their organization against human error and potentially fraudulent activities. 

Independent schools should begin by mapping out workflows with clearly defined responsibilities for each stage of the process. For example, consider the following processes when a school receives an invoice from an external vendor:

• Invoice received 
• Invoice entered into General Ledger against an expense account
• Invoice entered into the Accounts Payable module
• Invoice posted to the General Ledger
• Invoice reviewed and approved 
• Payment is issued

By having clearly defined responsibilities at each stage of this process, independent schools can avoid the potential for any errors. If an error was made entering the invoice into the accounts payable module, it would be flagged by the person assigned to review and approve the invoice, thus preventing potential over or underpayments. 

As policies and procedures evolve, independent schools should maintain up-to-date records of their organization’s workflows. Policies can often change unexpectedly, such as when a member of the accounting team leaves and other team members step in to fill parts of their role. It is important to update these policies as changes occur, and periodic review and walkthrough of these controls is recommended to ensure the control is operating as intended. 

Smith + Howard: Trusted Assurance, Accounting, and Advisory Services for Independent Schools

Developing robust internal controls and embracing segregation of duties is an important focus area for all independent schools. Administrators should not view this as a question of whether they trust their accounting department – rather, it’s a question of protecting these valued team members against the human errors that we all make. 

If you need guidance developing segregation of duties procedures for independent schools, our accounting and advisory professionals at Smith + Howard are here to help. Our experienced independent schools accounting team has a proud track record of advising a wide variety of educational institutions. We’re equipped to assist with the development of internal controls policies and provide guidance on a wide variety of other accounting and financial issues. 

Our team endeavors to serve as a trusted partner to independent schools, helping to build enduring financial infrastructure that ensures schools can continue providing first-class educational experiences for the future leaders of our communities. 

To learn more about Smith + Howard’s assurance, accounting, and advisory services for independent schools, reach out to an advisor today.