RSM New Zealand

The importance of segregation of duties in preventing fraud

The National Business Review (NBR) recently published an article profiling Upper Hutt College, whose former executive officer Donald Hancox plead guilty to 10 fraud charges in relation to his swindling $375,000 from the college. 

The overwhelming lesson to learn from this case, and others we have seen, is the importance of segregating duties so no individual has control over entire parts of the accounting system.  We detail the reasons for this below.

In most of the schools we audit we find that the size of the administration team doesn’t allow for an ideal level of segregation of duties.  This requires us to report on this control weakness in our management letter to school boards.  As a result we are often asked “why is this in our management letter?”  Cases such as this sad situation at Upper Hutt College, while extreme, show why it is important that adequate segregation of duties remain at the forefront of people’s minds.  Where ideal segregation of duties is not practical, compensating controls should be put in place. 

For this reason, we make no apologies for continuing to raise the issue of segregation of duties as an important internal control.

In the Upper Hutt College case, the school executive officer submitted false invoices for goods and services over a 7-year period when the college was going through building work, and directed payments to bank accounts controlled by or linked to him.

As stated in the article and is commonly the case in fraud discoveries; "Mr Hancox was away when the concerns were raised and anomalies were uncovered so a specialist financial advisor was called in to work through the school's financial position. This demonstrates the importance of a segregation of duties in this area."  We would argue that it equally shows the importance of ensuring that key administration staff take leave from time to time with their jobs being completed by others in their absence.

You can read the full article here

As your independent advisors, we will continue to review the adequacy of your control environment during our audit.  Appropriate internal controls, including segregating duties within the accounting function wherever possible are your best line of defence against a fraud happening at your school.  However, we remind you that it is the responsibility of the board and management to ensure that appropriate controls remain in place to detect and prevent fraud. Regular oversight and review and a sceptical mindset from senior management and the board are an important part of this.  

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Authors

Brendon Foy
Associate Director - Audit - Auckland Central
Mithun Lal
Audit Manager - Auckland Central