Segregation of duties definition

What is Segregation of Duties?

The segregation of duties is the assignment of various steps in a process to different people. The intent behind doing so is to eliminate instances in which someone could engage in theft or other fraudulent activities by having an excessive amount of control over a process. In essence, the physical custody of an asset , the record keeping for it, and the authorization to acquire or dispose of the asset should be split among different people.

The segregation of duties is an essential element of a control system. Auditors will look for duty segregation as part of their analysis of an entity's system of internal controls , and will downgrade their judgment of the system if there are any segregation failures. When there are segregation failures, the auditors will assume that there is an expanded risk of fraud , and adjust their procedures accordingly. This change in procedures usually involves in increase in the amount of audit work, which is passed through to the client in the form of higher audit fees.

The segregation of duties is more difficult to accomplish in a smaller organization, where there are too few people to effectively shift tasks to different people. Another issue with segregation is that shifting tasks among too many people makes the process flow less efficient. When a higher level of efficiency is desired, the usual trade-off is weaker control because the segregation of duties has been reduced.

Related AccountingTools Course

Accounting Controls Guidebook

Examples of Segregation of Duties

As an example of the segregation of duties, the person who receives goods from suppliers in the warehouse cannot sign checks to pay the suppliers for those goods. As another example, the person who maintains inventory records does not have physical possession of the inventory. And as a third example, the person who sells a fixed asset to a third party cannot record the sale or take custody of the payment from the third party.