The Importance of Segregation of Duties
by Marvin M. Mendieta, CPA, Audit Manager
Posted on May 18, 2012
A key element to maintaining strong internal controls in your organization that help prevent and detect fraud is the implementation of segregation of duties. Segregation of duties entails separation of specific duties in a given transaction cycle (e.g. cash receipts) so not one person performs all the areas of that cycle. When properly enforced, it creates accountability among employees who are responsible for the specific areas of the cycle and helps minimize collusion.
To ensure segregation of duties is achieved, the following areas should be separated among different employees:
- Authorization/approval
- Recordkeeping
- Custody of assets
- Reconciliation
For example, in the cash receipts cycle, the employee who opens the mail and collects cash should not be responsible for authorizing or recording the transaction in the accounting system. Moreover, the employee preparing the deposit should not be responsible for recording the deposit or preparing the bank reconciliation.
In the cash disbursements cycle, the employee who approves invoices for payment should not be responsible for recording invoices in the system. In addition, the employee responsible for making changes to the vendor master file should not be tasked with authorizing or recording vendor payments. Ideally, one employee should not perform more than one of the above areas to ensure proper segregation of duties.
However, sometimes segregation of duties can prove challenging to some organizations with smaller departments and limited number of personnel. Even with fewer employees, it is still critical to separate duties as much as possible as a fraud-deterrent measure. When there are duties that cannot be separated, compensating controls should be implemented.
A recommended compensating control is a detailed supervisory review of the related duties performed by the employee of a given transaction cycle. The supervisory review should come from someone who is not involved in the authorization/approval, recordkeeping, custody or reconciliation procedures of the transaction cycle, thereby ensuring the reviewer’s independence.
Understanding the importance of implementing segregation of duties is critical in protecting the assets of your organization. Ensuring employees are tasked with the appropriate duties and properly separating them will help your organization manage and minimize risks of possible fraud.