Segregation of Duties

Segregation of duties is critical to effective internal control because it reduces the risk of mistakes and inappropriate actions. It helps fight fraud by discouraging collusion and enhancing internal check. Segregation of duties is an Internal Control Concept in which individuals do not have responsibility for incompatible activities. In general, the following functions should be separated among employees:

• Approval
• Accounting/reconciling
• Asset custody

In other words one person should normally not participate in one or more than one function.

Transaction involve the following stages to complete

Initiate

Authorize

Record

Process

Reconcile

Handle Assets

Report

Segregation of duties is critical to effective internal control; it reduces the risk of both erroneous and inappropriate actions. In general, the approval function, the accounting/reconciling function, and the asset custody function should be separated among employees. When these functions cannot be separated, due to small department size, a detailed supervisory review of related activities is required as a compensating control activity. Segregation of duties is a deterrent to fraud because it requires collusion with another person to perpetrate a fraudulent act.

Specific examples of segregation of duties are as follows:

• The person who requisitions the purchase of goods or services should not be the person who approves the purchase.
• The person who approves the purchase of goods or services should not be the person who reconciles the monthly financial reports
• The person who approves the purchase of goods or services should not be able to obtain custody of checks.
• The person who maintains and reconciles the accounting records should not be able to obtain custody of checks.
• The person who opens the mail and prepares a listing of checks received should not be the person who makes the deposit.
• The person who opens the mail and prepares a listing of checks received should not be the person who maintains the accounts receivable records.

Segregation of duties becomes more important when the size of the organization grows considerably. In small organization it is possible to review most of the transaction by the owner or the top level management of the organization and may see little importance of segregation of duties. As the size of the organization grows, the importance of segregation of duties becomes more and more important. SOD has been observed as the bigger risk especially in the organization whose size is growing fast. It is mainly because SOD is balanced by deep review of top level management for all the critical transaction but when the size of the organization becomes larger it is virtually impossible to offer that level of deep review for those transactions. In such situation the management needs to review the roles of an employee seriously and attempt to minimize this risk. If management overlooks this matter sooner or later the management will have to encounter fraud related problem.