What is Segregation of Duties?

Rebecca A. Casarez, CPA

Rebecca A. Casarez, CPA

what is segregation of duties-ProAdvisor CPA

Purpose:

To Prevent Fraud and Errors.

Segregation of Duties is essentially a best practice for proper money management within an organization in order to prevent individuals from having the opportunity to divert company assets for personal gain, which increases the level of fraud risk.

CTA1-Segregation of duties factsheet-ProAdvisor-CPA

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 implemented Segregation of Duties within your organization, you will be conducted 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, you will be able to make sure that the people who have their hands on your money are actually managing it properly and 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.

Segregation of duties 3 phases image

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 to 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

CTA2-segregation of duties factsheet-ProAdvisor-CPA

Disclaimer:
This publication is designed to provide information of federal tax and accounting laws and/or regulations. It is presented with the understanding that the author is not rendering legal or accounting services.
This text is not intended to address every situation that arises or provide specific, strategic tax and/or accounting planning advice. This text should not be used solely to answer tax and/or accounting questions and you should consult additional sources of information, as needed, to determine the solution to tax and/or accounting questions.
This text has been prepared with due diligence. However, the possibility of mechanical or human error does exist and the author accepts no responsibility or liability regarding this material and its use. This text is not intended or written by the practitioner to be used and cannot be used by a taxpayer or tax return preparer, for the purpose of avoiding penalties that may be imposed.

Share this post

Share on facebook
Share on twitter
Share on linkedin
Share on email
Share on print
Close Menu