Segregation of Duties

What is segregation of duties?

Segregation of duties is an internal control that divides responsibilities so no single person controls all aspects of a transaction. One person should not authorize payments, record transactions, and reconcile accounts. Separating these functions creates checkpoints where errors or fraud are more likely to be detected. The principle assumes honest mistakes happen and dishonesty is possible.

Applying segregation in small teams

Small businesses struggle with segregation because they lack enough people to divide duties properly. The owner often handles everything. Compensating controls help. Have the owner review bank statements directly from the bank, not from the bookkeeper. Use software with audit trails. Require dual signatures on large checks. Perfect segregation may be impossible, but some separation is better than none.

Key areas requiring segregation

Cash handling and recording should be separate. The person who opens mail should not post payments. Payroll preparation and approval should involve different people. The person authorizing purchases should not also receive goods. Bank reconciliation should be done by someone other than the person writing checks. Each separation adds a layer of protection against both error and fraud.