Segregation of Duties

The basic idea is that the person who authorises a transaction should not also be the one who records it, holds the related asset or checks it. Splitting these roles creates natural checks.

For example, in a purchasing process, one person might approve new suppliers, another place orders, a third record invoices and a fourth make payments. If one person could do all four, they could create a fake supplier, approve fake invoices and pay themselves without anyone noticing.

Similarly, the employee who handles cash receipts should not be the one who reconciles the bank account, because they could hide missing money in the records.

In small organisations with few staff, full segregation may not be practical. In those cases, other controls can compensate, such as owner review of transactions, regular independent checks or mandatory holidays that require someone else to cover a role.

Segregation of duties is one of the most important internal controls. Auditors routinely test whether it is in place, because its absence significantly increases the risk of fraud.