The separation of duties concept prohibits the assignment of responsibility to one person for the acquisition of assets, their custody, and the related record keeping. For example, one person can place an order to buy an asset, but a different person must record the transaction in the accounting records. By separating duties, it is much more difficult to commit fraud, since at least two people must work together to do so - which is far less likely than if one person is responsible for all aspects of an accounting transaction.
Examples of the separation of duties are:
- Cash. One person opens envelopes containing checks, and another person records the checks in the accounting system. This reduces the risk that checks will be removed from the company and deposited into a person's own checking account.
- Accounts receivable. One person records cash received from customers, and another person creates credit memos to customers. This reduces 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.
- Inventory. One person orders goods from suppliers, and another person logs in the received goods in the accounting system. This keeps the purchasing person from diverting incoming goods for his own use.
- Payroll. One person compiles the gross and net pay information for a payroll, and another person verifies the calculations. This keeps a payroll clerk from artificially increasing the compensation of some employees, or from creating and paying fake employees.
A problem with the separation of duties is that it is much less efficient and more time-consuming than having a single person be responsible for all aspects of a transaction. Thus, you should examine the tradeoff between increasing the level of control and reducing the amount of efficiency when deciding whether to implement the separation of duties in some areas. It is quite possible that the improvment in control is not sufficient to offset the reduced level of efficiency.
A misconception about the separation of duties is that it reduces the amount of accounting errors. This only happens if there is duplicate data entry, or if multiple people verify each others' work. This is not the goal of the separation 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.
The separation of duties is also known as the segregation of duties.