Meaning Of Segregation Of Duties

The segregation of duties concept disallows the assignment of responsibility to one person for the acquisition of assets, their custody, and the related record keeping. Segregation of duties is one of the most effective tools for internal controls. It means that no one person should be responsible for doing all the jobs in an organization.Distribution, authorization, recording and custody of assets should be performed by different employees.

For instance, one person can place an order to buy an asset, but a different person will record the transaction in the accounting books. In segregation of duties, it is much more difficult to commit fraud, since at least two or more people must work together to in carrying out the duties - which is far less likely than if one person is responsible for all aspects of an accounting transaction.

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Although, segregation of duties improves security, breaking tasks down into separate components can negatively impact business efficiency i.e it is time-consuming and increase costs, complexity and staffing requirements. Because of these reasons, most organizations apply Segregation of Duties to only the most vulnerable and the most mission critical elements of the business. Segregation of duties also means separation of duties

EXAMPLES OF SEGREGATION OF DUTIES
The following are examples of segregation of duties:

CASH: In this case, one person opens envelopes containing checks, and another person records the checks in the accounting system. This helps to reduce the risk that checks will be removed from the company and deposited into a person's own checking account.

ACCOUNTS RECEIVABLE: In this case, one person records cash received from customers, and another person creates credit memos to customers. This often helps to reduce the risk that an employee will divert an incoming payment from a customer and cover the theft with a matching credit to that customer's account.

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INVENTORY: In inventory, one person orders goods from suppliers, and another person logs in the received goods in the accounting system. This will help keep the purchasing person from diverting incoming goods for his own use.

PAYROLL: In payroll, one person compiles the gross and net pay information for a payroll, and another person verifies the calculations. This also help to keep a payroll clerk from artificially increasing the compensation of some employees, or from creating and paying fake employees.

One of the misconception about the segregation of duties is that it reduces the amount of accounting errors. This will only happen if there is duplicate data entry, or if multiple people verify each others' work. Although this is not the goal of the segregation of duties concept, which is targeted at giving certain tasks to one person, and other tasks to another person - the concept is not designed for the duplication of tasks, so accounting errors are not likely to be reduced.