Adequate segregation of duties is a critical internal control principle that ensures no single individual has control over all aspects of a financial transaction or process. This approach mitigates risks such as fraud, errors, and misappropriation by dividing tasks among multiple employees, providing a system of checks and balances[5].
The basic concept is that incompatible responsibilities—such as authorizing transactions, custody of assets, and record-keeping—should not be performed by the same person. By segregating these duties, organizations make it more challenging for any one employee to both perpetrate and conceal unethical or erroneous acts[5].
Examples of critical segregation of duties include:
- Accounts Payable: One employee processes invoices, while another approves payments. This setup prevents a single individual from creating fraudulent invoices and authorizing their own payments[1].
- Payroll: Employee setup and payroll disbursement tasks are separated. This deters the setup of fictitious employees and misdirecting payments[1].
- Cash Handling: Receiving physical payments is separated from recording those payments in the accounting system[1].
- Inventory: Purchaser orders stock; another person receives and counts incoming goods. This helps prevent inventory fraud and discrepancies[1].
- General Ledger: The individual who creates journal entries cannot approve them, ensuring independent review[1].
For an effective segregation of duties framework, organizations should:
- Define clear roles and responsibilities: Ensure everyone’s duties are well-documented and there is no overlap that could create conflicts of interest[6].
- Implement role-based access control (RBAC): Limit system access to only what is necessary for each role, reinforcing the “least privilege” principle[6].
- Use structured approval workflows and dual authorizations: Especially in high-risk areas such as accounts payable, structured processes help enforce separation between verification, approval, and transaction processing[4].
- Monitor and reevaluate periodically: Regular reviews and audits can help identify weaknesses or conflicts in existing duties[2].
Although segregation of duties strengthens control and minimizes risk, it may introduce operational challenges, such as increased need for staff and potential process delays. Organizations must balance these challenges relative to their size and resources while prioritizing risk mitigation benefits[4].
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