The segregation of duties is the distribution of tasks performed by individuals in a business place.
Why is the segregation of duties necessary?
By splitting tasks amongst several individuals, you reduce the risk of fraud. One side of the fraud triangle is opportunity. Placing proper segregation of duties in place limits an individuals’ chance to commit fraud.
Segregation of duties takes one task and divides the task into two or more phases, jobs, or components. No one individual should have complete control over a process. By limiting control over a process, it provides a barrier to a fraud potentially being committed.
Rather than separating duties between multiple people, a duty can be shared. Referred to as dual custody. Dual custody is when two individuals simultaneously perform the same task.
Segregation of duties cannot adequately prevent things such as collusion and management override.
What is a segregation of duties example?
Let’s look at Accounts Payable as an example of segregation of duties. There is one person who can set up and approve new vendors. A different person is in charge of issuing payments to vendors.
An employee has less opportunity to cut a check to themselves, family members, or friends if they cannot both enter new vendors into the accounting system and issue a payment. These controls provide a barrier to the employee being able to siphon money out of the business.
What is a dual custody example?
Dual custody is when two individuals perform a task together, such as opening the mail. Two employees stamp the back of checks with the company’s deposit stamp, count cash, and prepare the bank deposit.
Another example of dual custody is requiring two individuals to make a deposit at the bank.
This dual custody provides a barrier to an employee being able to siphon out cash that comes into the company. It also prevents an employee from being able to pull a check and commit a check tampering scheme.
How do large and small companies differ?
Large and small companies both have and need internal controls. The way the internal controls look is just different.
In a large company, it is easy to spread the workload amongst several individuals. The problem with segregation comes with not remembering or knowing what access the person has had in the past. Employers need to make sure that new work activities do not provide issues with previous/current responsibilities.
It is easier to have control over and know what task each employee performs within a small company. However, the business owner must be much more involved in the business to make the controls work.
What if I work in a small company?
The above segregation of duties example had the duties between inputting a new vendor and paying the vendor separated. However, in a small company, these roles are performed by the same individual. Software meant for small businesses typically does not allow you to prevent an employee from accessing both functions.
In this case, the business owner should review a report from the accounting software that shows all new vendors’ input for the month. Any vendors you are not aware of or don’t remember doing business within the last month should be questioned. Require that the accountant/bookkeeper provide documentation as to what services were provided to jog your memory. There are several additional steps that you can take to verify that vendors are legitimate.
How can I assess my segregation of duties?
The best way to determine your segregation of duties is to map out your business processes. There are several different ways and styles of documentation that can accomplish this goal. Mapping out your business processes allows you to see where internal controls exist and where they are lacking.