Segregation of Duties

Segregation of duties is the term used for accounting systems with appropriate separation of accounting functions by different personnel. It is desirable to have segregation of duties, but it is not always possible, especially in smaller entities with a limited number of employees.

Entities should separate the following duties:

• Authorizing transactions
• Custody of assets
• Reconciling accounts
• Bookkeeping

If one employee performs more than one of these functions, then the entity is often subject to a higher potential of theft. Fraudsters desire to hide their thefts. And performing more than one of these duties will sometimes allow an employee to steal and hide.

If one person performs all four of the above duties, then it is fairly easy for that employee to steal. In such a situation, the entity should implement surprise checks as a fraud deterrent (maybe have a CPA appear unannounced and review transactions). The organization might also have board members or owners periodically review activity within the entity.

Consider a business that has one bookkeeper that signs checks, reconciles the bank statement, and enters transactions into the bookkeeping system. This internal control weakness allows the employee to write checks to himself. And the theft might go undetected since this same person handles the bookkeeping and bank reconciliations.

Auditors perform walkthroughs of transaction cycles, and they look to see if the entity as sufficient segregation of duties. If segregation is not present, the auditor might decide to perform additional substantive procedures to see if theft is occurring.