What is Segregation of Duties?

Purpose:

To Prevent Fraud and Errors.

Definition:

“Segregation of Duties (SOD) is a basic building block of sustainable risk management and internal controls for a business” (aicpa.org, Segregation of Duties)

What the heck does that mean?

What this definition is saying is that by implementing Segregation of Duties within your organization, you will be conducting proper risk management.

By Implemented Segregation of Duties, you are taking actions that help you manage the risk of fraud and errors.

How to implement Segregation of Duties?

This is actually quite a simple process, think of it like checks and balances. 

By utilizing these steps you will not only deter fraud within your organization, but you will also be able to make sure that the people who have their hands on your money are actually managing it properly.

You will be able to catch mistakes that would slip through the crack otherwise.

The Segregation of Duties is separated by 3 different phases of a transaction

1. Authorization

2. Record Keeping

3. Custody

All three of these phases must have different employees responsible for them. 

If an employee’s responsibilities encompass 2 or more phases of a transaction (Segregation of Duties) they have the opportunity to divert company assets for personal gain, which increases the level of fraud risk.

Phase 1: Authorization

This individual is responsible for authorizing transactions.

They have:

• General Authorization

• Specific Authorization.

Phase 2: Record Keeping

A record of cash collected must be maintained by the one responsible.

Some of their duties include:

• Preparing source documents

• Maintaining journals, ledgers, and/or other files

• Preparing reconciliations

• Preparing performance reports

Phase 3: Custody

This individual is responsible for the physical control of Assets.

Some of their duties include:

• Handling cash

• Handling inventories, tools, and/or fixed assets

• Writing checks

• Receiving checks in the mail

Segregation of Duties is a form of Internal controls.

Internal control is a process put in place to minimize risk, ensure compliance with applicable laws and regulations, and eliminate fraud and abuse.

To learn more about Internal Controls go to our blog article – What are “Internal Controls”?

Source: Ghosn, Anthony (unk.) Segregation of Duties (SOD), © 2006-2017 American Institute of CPAs. All rights reserved. Used with permission. Retrieved July 16, 2017 from:https://www.aicpa.org/InterestAreas/Information Technology/Resources/Auditing/InternalControl/Pages/value-strategy-through-segregation-of-duties.aspx