Segregation of duties
Definition
Segregation of duties is an internal control that splits key steps of a financial process among different people so no single person can both commit and conceal an error or fraud. The classic split separates authorizing transactions, recording them, and having custody of assets.
Why it matters
Even in a small business, letting one person approve, pay, and reconcile bills creates risk of theft or undetected mistakes. Where staff is limited, owner review of bank statements and reports can act as a compensating control.
Example
At a small clinic, the office manager enters $8,000 of vendor bills, the owner approves and releases payments, and an outside bookkeeper reconciles the bank account each month. If a fake $500 vendor bill were entered, the owner's approval or the bookkeeper's reconciliation would likely catch it.
Common questions
How can a very small business achieve segregation of duties?
Owners can review bank statements directly, approve all payments, require dual signatures for large amounts, or use an outside bookkeeper or accountant for reconciliations.
What are the three duties that should be separated?
Authorization of transactions, recordkeeping, and custody of assets are the three functions that should ideally be handled by different people.
Related Terms in Core Accounting
Bank rule (bank feed rule)
A bank rule is an automated instruction in accounting software that categorizes imported bank or card transactions based on conditions such as payee, description, or amount. When a transaction matches the rule, it is assigned the preset account, contact, or tax treatment automatically.
Continuous close
Continuous close is an approach to accounting where reconciliations, categorization, and adjustments are performed throughout the period rather than all at once at month end. The goal is to keep the books close to final at any point so the formal close takes much less time.
Accrued Expenses
Costs a business has incurred but not yet been billed for or paid, recorded as a liability so the expense lands in the period it belongs to. Typical examples are wages earned but unpaid at month end, interest, and utilities consumed before the invoice arrives. Reversed when the actual bill is booked.
Accrued Revenue
Revenue earned by delivering goods or services that has not yet been invoiced to the customer, recorded as an asset. Common on milestone contracts and retainers where work is performed in one period and billed in the next. The opposite situation to deferred revenue.
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