- “Explanation is not half as strong as experience, but experience is not half as strong as experience and understanding.”… Mark Z Danielewsky
Welcome to Part 3 of this series. Segregation of duties is a key principle in financial control, aiming to reduce the risk of fraud and error. It involves breaking down processes so that no single person is responsible for every stage in a process.
When a single individual carries out all stages in a process with no checks, the potential exists for errors to be made or for fraud to occur. There are some areas where segregation must be achieved, for example expense claims must always be authorised by someone other than the claimant.
There are, however, some areas where smaller departments may struggle to achieve segregation. Where segregation cannot be achieved, as an alternative it is important to consider what monitoring controls can be put in place to pick up possible errors and discourage fraud through likely discovery.
Cheque books and withdrawal booklets
Sometimes the cheque book can be described as a “double-edged” instrument. It can make or unmake an account holder. When it falls into wrong hands, all the funds of a customer can be withdrawn with the use of one or two cheque leaflets! All cheque books should also be under lock until it is delivered to the customer. To prevent the cheque books from falling into wrong hands, it should be handled by specific officers.
Tellers and other personnel who can generate financial transactions on accounts should not handle cheque books. They should usually be handled by the customer service personnel, who are responsible for receiving the orders, sending the orders for printing and delivering them to the customer. To prevent internal fraud, managers and supervisors are expected to do regular snap checks of all cheque books in the branch whether in the vault, cabinet, etc.
The reason? To ensure the ones received in the branch, including over-stayed ones not collected by the customers, are still intact and no fraudulent pull-outs have been done. When was the last time you did a snap check on the cheque books in your system? How is reconciliation done? Remember, calling customers to collect their over-stayed cheque-books is an avenue to revive dormant accounts.
Best Practices to resolve Segregation of Duties conflicts
Internal Audit would need to work collaboratively with the business and the IT teams to segregate these duties wherever possible and assign an appropriate mitigation control in cases wherein it is not feasible to do so. In addition, these controls would need to be monitored on a regular basis and the results reported to senior management.
Segregation of Duties in Cash Transactions
Since the banks’ stock-in-trade is cash, the segregation of cash duties is a policy to reduce the risk of accidental and intentional money loss by employees. Proper segregation of duties in a cash business requires authorization, custody, recording and reconciliation. A good combination of all these steps involved in dividing and overlapping duties is a great way to reduce the chances of human error and fraud.
The following process shows that the segregation is complete when the cash management goes through the following four main activities:
Authorization is the first step in the chain of custody. Only one person is authorized to perform such a duty. For example, a teller receives cash, but he or she should not retain the cash in his or her custody.
The length of custody depends on the duty. For example, a cashier handling money for an eight-hour shift in most cases should count and record his or her end-of-day totals, but a supervisor should reconcile the totals to verify the cash against receipts. This ensures that all money is accounted for and none is missing.
Recording of transactions
Recording requires a teller or supervisor to physically and electronically record a cash total in the system. This cash duty ensures a paper trail that follows the money. 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 correctly. When a teller reconciles the cash totals for the day, it provides an opportunity for the branch to detect any errors in accounting or discover potential internal theft. The bank should always have a different person to reconcile than the one who received, handled or recorded the money.
Finally, let us look at cash-in-transit. It is not done by one person. In fact, due to security reasons, the team includes a police guard.
Cases of Absolute Trust and the Resulting Betrayal
- Two Friends were vault custodians. One went out shopping and left his key with the other. That day’s cash was not reconciled. Three days later, the cash in vault was short by GHc10,000. There was no CCTV coverage in the vault.
- A teller left her cubicle open and went for lunch. Various functionaries went in and out of her cubicle in her absence. A shortage of cash was detected at the end of day. One bundle of GHc20 notes was stolen. The CCTV in the branch was faulty on that day.
- A branch manager, who was a key holder, decided to leave her keys with one of her “trusted” officers for her use the next day. The officer did not sign for it in the key holding register. There was a shortage of one GHc5 bundle. (GHc5,000)
- A specie transaction was not accompanied by a police guard. The teller was left alone with the driver, who at a point left the car to buy a bottle of coke at a filling station. There was a shortage detected at the end of day.
- The tellers in the bulk cash counting bay (where bulk cash is checked) went out for lunch leaving only one teller. The cash boy was also sent to purchase food for the branch manager. A shortage of GHc5,000 was recorded at the end of day.
- A cash collection exercise from customers’ premises was delayed causing the police guard to abandon the specie team mid-way, when it was 5.00pm, leaving only the teller and driver. They were accosted by armed robbers.
I will pause here and continue next week
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TO BE CONTINUED
ABOUT THE AUTHOR
Alberta Quarcoopome is a Fellow of the Institute of Bankers, and CEO of ALKAN Business Consult Ltd. She is the Author of Three books: “The 21st Century Bank Teller: A Strategic Partner” and “My Front Desk Experience: A Young Banker’s Story” and “The Modern Branch Manager’s Companion”. She uses her experience and practical case studies, training young bankers in operational risk management, sales, customer service, banking operations and fraud.