Understanding segregation of duties

Most U.S. companies use the internal control framework created by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Under this framework, there are five components of internal control: the control environment, risk assessment, control activities, information and communication, and monitoring. Segregation of duties falls under the framework’s control activities component.

Segregation of duties, also known as separation of duties, helps ensure that essential actions are taken to lessen potential risks in the achievement of the entity’s purpose. Generally, there are four guidelines for sufficient segregation of duties that is used to prevent fraud and errors in audits.

The first is to separate the responsibility of managing assets from accounting. To avoid fraud, the individual who accounts for the company’s assets, such as cash, should not be the same person recording the assets in the accounting books. If the same person is responsible for both jobs, the risk of fraud increases.

The second is to split the responsibility of authorizing a transaction about an asset from the individual who is responsible of the asset. For example, a manager who approves a subcontractor bill should not be the one signing the check for the bill. Ideally, the manager should approve the payment of the bill and the CEO or Treasurer should be the only one authorized to release the funds.

The third is to separate operational responsibilities from the accounting responsibilities. For example, if a sales person is also performing accounting duties, they could modify reports during a slow month to cover sales shortfalls and still pay themselves their monthly bonus. Preventative measures such as separating each departments duties from the Accounting Department will provide more accurate numbers and reports.

The fourth is to separate information technology duties from the user departments. As IT becomes more and more complex, there needs to be a separation of responsibilities between who sets up the accounting software and who uses the accounting software.

Ultimately, effective segregation of duties creates a check and balance for the business. Not only does it have different levels of checks built in to prevent fraud, it also allows for different people to look at situations and make sure that accurate information is disclosed. With accurate information, business owners and investors can have reliable reports to make the necessary decisions to sustain a successful business.

Written by:
Erika Marasigan
TGG Accounting
 
 
Reference:
Arens, A. A., Elder, R. J., & Beasley, M. S. (2008). Auditing and Assurance Services: An Integrated Approach. (12th ed.). New Jersey: Pearson Education.
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