Segregation of Duties: Benefits & Risks

Instructor: Deborah Schell

Deborah teaches college Accounting and has a master's degree in Educational Technology and is holds certifications as a CIA, CISA, CFSA, and CPA, CA.

A business puts internal controls in place to ensure its assets and records are protected from theft and errors. In this lesson, you will learn about segregation of duties.

What Are Internal Controls?

Let's meet Susan who is the owner of Susan's Stationery Store. Susan has been in business for five years and her business is expanding. Her accountant suggested that Susan look into implementing some internal controls including segregation of duties to better manage her business. Susan would love to follow her accountant's advice, but she isn't quite sure what it means. Let's see if we can help Susan with this problem.

Internal controls are the procedures that a business uses to protect its records and its assets or things of value that it owns. Internal controls also help a business ensure that it is using its resources most effectively and it helps to prevent and detect errors.

What Is Segregation of Duties?

Segregation of duties means dividing duties so that the functions of recordkeeping, custody of assets and authorization of asset use are performed by different individuals. Dividing these duties is necessary to ensure the company is not a victim of theft of its assets and records or fraud which is a deliberate attempt to deceive others for personal gain. Smaller companies often have a more difficult time dividing up these duties as there are fewer employees who can do each job.

Benefits of Segregation of Duties

As Susan's business grows, there may be some confusion about who is responsible for what task. Susan could have a situation where two people are performing the same task resulting in duplication of effort which would be a waste of money for her business. Working to segregate all duties, however, would bring this error to light.

Susan's business growth could also lead to certain tasks not being reviewed which could make her more susceptible to error or fraud. Let's assume that Susan used to reconcile the company's bank account every month. Now that the business has grown and the company has several bank accounts, Susan has delegated this reconciliation responsibility to Becky in the accounting department. If Becky also has access to change the accounting records, she could commit a fraud and then use her recordkeeping access to hide it.

Segregation of duties will also help Susan ensure that her assets are safe from misappropriation. When Susan's business was small, she knew all her employees by name and could recognize them when she signed their paychecks. If Susan does not have adequate segregation of duties in the payroll department, one of her employees could set up a fictitious employee, create a paycheck for them and pocket the money. Susan wouldn't necessary catch this problem as she no longer recognizes the names of each of her employees due to the expansion of her business.

Risks of Segregation of Duties

It is never possible to eliminate errors from occurring as employees could participate in collusion which is a situation where they can work together to defeat internal controls.

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