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December 16, 2014

Mitigate Your Risk by Segregating Key Duties

Segregation of Duties is imperative for any business – no individual should have so much access to enable them to execute transactions across an entire business process without a good system of checks and balances. If you are struggling with this concept, you are not alone. Why does it seem so difficult to so many?

Sometimes it can be the complexity of the system, ownership and/or simply accountability. More frequently, it is just a matter of one or a couple of key employees who have taken on more and more duties over the years. Segregating their duties seems disloyal or unproductive. But it is essential for a quality internal controls system.

The good news is that companies don’t need to create complex role structures or completely overhaul systems to get a better handle on a segregation of duties system that works for you and enhances your internal controls.

Where to Start
A fundamental element of internal control is the segregation of certain key duties. The basic underlying element in segregation of duties is that no employee or group of employees should be in a position to commit and to conceal errors or fraud in the normal course of their duties. Although it is a basic premise, it ensures that errors or irregularities are prevented or detected on a timely basis by employees in the normal course of business. In general, the principal incompatible duties to be segregated are:

  1.  Custody of assets
  2. Authorization or approval of related transactions affection those assets
  3. Recording or reporting of related transaction

Traditional systems of internal control rely on assigning certain responsibilities to different individuals or segregating incompatible functions. In general, segregation of duties implies that:

  •  No single individual should have control over two or more phases of a transaction or operation
  • Management should assign responsibilities to ensure a crosscheck of duties

Failing to separate these duties creates opportunities to conceal inappropriate activity. Even trusted employees are not exempt from a proper internal control structure. It is important to review the duties assigned to your staff and ensure one individual does not have the ability to initiate, approve and record a transaction. It is imperative that someone else in the company has custody of the asset and reconciles the activities and resultant account balance.

For more information about segregation of duties and which transactions pose the greatest risk to your business, contact your accountant. By taking the appropriate steps, you can remedy and mitigate those areas where you are most vulnerable.

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