How policies and procedures can help you implement segregation of duties

Segregation of duties is one of the most critical functions of internal control, helping to reduce the risk of fraud and error. To be successful, it must be supported by clear policies and procedures that require multiple roles to be involved in the fundamental steps of a transaction.

Outlining clear segregation of duties within policies and procedures can lead to strong internal controls and a transparent operational environment.

What is segregation of duties?

The central premise of segregation of duties is that an individual shouldn’t be in a position to initiate, approve, and review the same transaction. The accounting, reconciliation, and custodial functions are incompatible duties and should each be assigned to separate roles within the organization. These functions should be clearly delineated within the policies and procedures.

Segregation of duties is typically viewed as a preventative control, as separating the individual tasks within a transaction cycle is done to reduce the risk that errors or omissions will occur in the first place. However, segregation of duties can also be useful in detecting errors or issues through the approval process.

Benefits of outlining policies and procedures for segregation of duties

Policies and procedures outlined to support adequate segregation of duties protect the organization and employees by ensuring that no one employee can perform all the steps involved in handling and accounting for financial transactions.

Key benefits include:

• Fraud prevention. By dividing responsibilities among different individuals, the likelihood of fraudulent activities is significantly reduced as it would require collusion.
• Accountability. Clearly defined roles and responsibilities increase accountability among employees. It becomes easier to identify where a process may have failed and who’s responsible.