The segregation of duties is the assignment of various steps in a process to different people. The intent behind doing so is to eliminate instances in which someone could engage in theft or other fraudulent activities by having an excessive amount of control over a process. In essence, the following three general functions in a process should be split among different people:
- Physical custody of an asset
- Record keeping for the asset
- Authorization to acquire or dispose of the asset
Here are several examples of the segregation of duties:
- The person who receives goods from suppliers in the warehouse cannot sign checks to pay the suppliers for those goods.
- The person who maintains inventory records does not have physical possession of the inventory.
- The person who sells a fixed asset to a third party cannot record the sale or take custody of the payment from the third party.
The segregation of duties is an essential element of a control system. Auditors will look for duty segregation as part of their analysis of an entity's system of internal controls, and will downgrade their judgment of the system if there are any segregation failures.
The segregation of duties is more difficult to accomplish in a smaller organization, where there are too few people to effectively shift tasks to different people. Another issue with segregation is that shifting tasks among too many people makes the process flow less efficient. When a higher level of efficiency is desired, the usual trade-off is weaker control because the segregation of duties has been reduced.
The segregation of duties is also known as the separation of duties.