For any organization processing a large number of customer transactions, having proper accounting practices and safeguards in place is critical to ensuring the integrity of the operation. Staff will come and go and there will always be a need to hire and train new personnel – especially those with access to your company’s funds and customer data. To maintain tight internal controls, help comply with Sarbanes Oxley Section 404 and protect the organization’s cash flow, I’ve listed 5 areas where segregation of duties is important in order to reduce risk and prevent employee fraud. There are dozens of areas in any organization where fraud might occur, but these 5 are among the most important as it relates to the Order-to-Cash process.
- Customer Master Data Management
Those responsible for an organization’s customer master file play an important role, as they are tasked with ensuring their company’s customer information is accurate, up to date and accessible. The information contained within an organization’s customer master data is a veritable goldmine. Those records come in handy during sales efforts, plans for expansion, merger or acquisition discussions, or to properly forecast for the upcoming year.
Companies should ensure personnel in this area do not also have direct oversight in areas that process customer invoices. This can increase the risk of unauthorized charges made against the customer master file resulting in phantom invoices, improper terms and fraudulent payments.
- Sales and Order Management
Sales are the lifeblood of any organization. Ensuring those transactions are carried through to their proper conclusion and customer orders are properly fulfilled can often mean the difference between profit and loss.
Though their roles are critically important, sales and order management staff should not also oversee customer delivery. This can lead to falsifying sales records to non-existing customers and siphoning valuable inventory from the company. Sales and order management should also not have direct oversight of invoicing and customer payment areas, as it could easily lead to falsifying records as well.
- Credit Management
If sales are the lifeblood of an organization, then credit management represent the nutrients that ensure a company remain financially healthy. Determining the best terms for each customer is critical to ensuring companies do not expose themselves to unnecessary risk.
Credit Management staff should not be directly responsible for tasks involving cash receipts and application. This can easily lead to unauthorized credit approval for high-risk customers, resulting in the possibility of manipulating incoming cash and its application in the general ledger.
- Invoice Management
Proper invoicing procedures can help ensure customers pay on time (or early), mitigate errors and exception handling, and reduce delayed payments.
While an organization will want their invoice management team to understand their role in the Order-to-Cash process, they will likely not want them authorizing sales orders and involved in cash application. Both instances introduce the risk of falsifying records and creating a discrepancy between orders and invoices. It can also lead to cash payments that may never show in the general ledger. There are safeguards in place at the customer level – correlating sales orders with POs and ultimately with invoices – but by the time the customer notices, the damage to your company’s reputation is already done.
- Cash Application Management
With the advent of automated cash application and other efficient solutions, many organizations have reduced both risk and error in cash application management. Nevertheless, many organizations are far from automating this segment of the Order-to-Cash process.
There should be a clear distinction between those with close proximity to and responsibility for handling cash receipts and those applying the cash. Automation, whether it’s in the form of software or off-site, third-party lockbox solutions, provides some safeguard and helps reduce risk, but these areas still require some form of manual oversight. Ensuring that oversight is properly segregated from other duties goes hand-in-hand with strengthening internal controls and helping safeguard the company’s cash flow.
Ernie Martin is Founder and Managing Director of Receivable Savvy. He brings over 25 years of experience in financial supply chain management, marketing and communications and draws upon his extensive experience to share knowledge and best practices with AR professionals. His resume also boasts time at several well-known brands and companies such as Tungsten Network, Delta Airlines, CIGNA Healthcare and Georgia Pacific as well as a number of years as an independent consultant.
