How can nonprofits protect their resources while maintaining the trust of donors and stakeholders? Segregation of duties (SOD) is a key internal control that helps organizations meet this challenge. By dividing responsibilities among multiple individuals, nonprofits can reduce the risk of fraud, improve accuracy, and ensure transparency while navigating the demands of limited resources and high accountability expectations.

Understanding Segregation of Duties

Segregation of duties involves dividing key financial and operational responsibilities among multiple individuals to minimize the risk of fraud, errors, and mismanagement. By ensuring no single person has control over all aspects of a process, nonprofits create checks and balances that safeguard their resources.

SOD applies to a variety of activities in nonprofit operations. For example:

  • Donation Management: One person records donations in the database, another deposits funds, and a third reconciles the records with bank statements. This division enhances transparency and reduces the likelihood of misappropriation.
  • Grant Administration: A program manager approves expenses, finance staff process payments, and an external reviewer compiles and submits the grant report. This structure ensures compliance with funder requirements while maintaining accountability.
  • Payroll Oversight: One employee prepares payroll by calculating hours worked, another reviews and approves it, and a third issues payments. This process prevents errors or fraudulent activities, such as creating fictitious employees.

Why Is Segregation of Duties Important?

Nonprofits operate under heightened expectations for financial accountability. Donors, grantors, and regulators rely on organizations to demonstrate sound stewardship of funds. SOD addresses these expectations in several critical ways:

Fraud Mitigation

Segregation of duties (SOD) reduces the risk of fraud by ensuring no single individual has complete control over critical processes. For example, separating invoice approvals from payment processing prevents unauthorized transactions. Research shows that over half of occupational fraud cases stem from a lack of internal controls or the override of existing controls. Implementing SOD directly addresses these vulnerabilities.

Error Reduction

Multiple layers of oversight help identify and correct mistakes before they escalate. For example, reconciling donation records with bank deposits promotes financial accuracy and reduces the risk of compliance violations.

Building Stakeholder Trust

Transparency in operations reassures donors and grantors that their contributions are being used effectively. Strong internal controls signal to stakeholders that the organization takes its fiduciary responsibilities seriously.

Ensuring Compliance

Nonprofits are often required to demonstrate strong internal controls to meet funding agreements and reduce the risk of audit findings. Form 990, which most nonprofits file annually, specifically asks about these controls. By implementing segregation of duties, organizations can confidently report sound governance practices.

Overcoming Potential Challenges 

Nonprofits may face obstacles when implementing segregation of duties (SOD), such as limited staff, tight budgets, and complex workflows. However, these challenges can often be managed with practical strategies and a focus on leveraging existing resources. By employing creative solutions, nonprofits can establish internal controls that safeguard their financial integrity and build trust with stakeholders.

Engage Board Members

Board involvement is a cost-effective way to enhance oversight. Finance committees can review and approve large transactions or oversee reconciliations, such as monthly bank statements, providing impartial accountability. Involving the board reinforces transparency and demonstrates to donors and grantors that the organization prioritizes sound financial management.

Leverage Technology

Affordable accounting software simplifies SOD by automating controls and restricting access to sensitive tasks. Role-based permissions can ensure no single individual approves and processes payments, while automated systems flag unusual transactions and require dual approvals for larger amounts. Scalable and budget-friendly tools make this solution accessible to nonprofits of all sizes.

Rotate Responsibilities

For nonprofits with limited staff, rotating responsibilities adds an extra layer of security. Cross-training employees to handle tasks like account reconciliation and payment processing allows roles to shift periodically, reducing the risk of fraud or errors. This practice also ensures operational continuity if staff changes occur.

Simplify Processes

Breaking down complex workflows into smaller, distinct tasks makes SOD more achievable. For instance, grant reporting can be divided into expense tracking, report preparation, and final review, while donation management can assign separate roles for recording, depositing, and reconciling funds.

Partner with External Professionals

Engaging external professionals provides an objective layer of oversight without requiring full-time hires. Bookkeepers, accountants, or auditors can assist with reconciliations, financial statements, or internal control assessments. Though this involves a cost, it’s often more affordable than expanding staff and ensures critical processes are managed by experienced professionals.

Proactive Steps to Implement SOD

  • Conduct a Risk Assessment: Identify high-risk areas such as cash handling, payroll, and grant management where SOD can have the greatest impact.
  • Map Current Processes: Document existing workflows to identify who is responsible for each task and where roles may overlap.
  • Define and Assign Responsibilities: Separate key tasks such as authorization, record-keeping, and reconciliation.
  • Introduce Oversight: Implement dual approval for significant transactions and require independent reviews of financial records.
  • Monitor and Refine: Regularly review internal controls to address gaps and adapt to organizational changes.

What’s Next

Segregation of duties is a practical and effective way for nonprofits to safeguard their operations, build trust, and maintain compliance. While resource limitations can complicate implementation, solutions like board involvement, technology adoption, and role rotation make SOD attainable for organizations of any size. For assistance in assessing or strengthening your internal controls, contact PBMares Not-for-Profit Partner Bo Garner.