Checks and Balances

The judicious segregation of key duties within a business is a fundamental principle of risk mitigation that should never be ignored or taken lightly. It follows that proper segregation of duties (SoD) accounting is a key responsibility of risk, audit and accounting departments.

For SoD controls, this does not refer to the principle of “division of labor,” which is necessary for maximum efficiency but not a matter of institutional risk control. Segregation of duties in auditing refers to shared responsibility, not shared work.

The concept behind SoD is the idea of having a system of checks and balances along several stages of important work production. More than one person in a chain of command, and some cases, more than one department in an organization should be accountable for the quality and integrity of work products.

In short, SoD means assuring that there is always more than one set of eyes on the most risk-intensive, crucial aspects of a business.

Where Is Segregation of Duties Most Important?

Handling and Processing Assets

Financial assets are the most obvious category of company property that demands strict SoD, but not the only one. A company’s assets comprise tangible assets like raw production materials, inventory, equipment and supplies as well as intangible resources like goodwill and company secrets (intellectual property).

Wherever company assets are controlled, used in production, or otherwise expended, unilateral decision-making should be tempered through a prearranged system of SoD.

Record-Keeping

The accurate recording of financial transactions is critical to the integrity of any organization. Shareholders (or other owners, such as partners), company officers, the board of directors, potential investors and government regulators demand and deserve precision in bookkeeping. The same goes for other nonfinancial but still critical records, such as human resources files.

Nowhere are segregation of duties controls more important than in record-keeping and accounting. All important records, especially records that will go into the creation of certified financial statements, should be processed using SoD protocols before being finalized.

Reconciliation

Reconciliation means reviewing transactions, ledger entries and documentation in the course of balancing the books. Accuracy is paramount in this endeavor.

SoD in the reconciliation process should include multiple accuracy checks by multiple people and a final test (audit) prior to certification.

How Many People Is Enough?

We’ve all heard the adage, “too many cooks spoil the broth.” That old saying is as applicable to SoD as it is to soup. We know it can be dangerous to have too few people managing risk, but we shouldn’t forget that it is also possible to have too many.

In the handling of financial assets or the overseeing of financial processes, the optimum number of people that should share overall responsibility is three. The minimum number is two. One is unacceptable. Four is acceptable but may be pushing it. Five and up is likely too many.

Assigning duties and defining roles is crucial. Overlap in some jobs could mean neglect in others. Responsibility should be shared but not necessarily shared equally. Personnel should be designated as “primary,” “secondary” and “backup.”

A Comprehensive Segregation of Duties Questionnaire

We’ve published several segregation of duties templates, checklists and articles on KnowledgeLeader. One of the best and most popular tools for reviewing or refining SoD processes is our Segregation of Duties Questionnaire.

Although the word “questionnaire” in the title of the tool insinuates it’s a single document, it is, in reality, 14 questionnaires that can be customized and adapted into countless more. The 14 featured are as follows:

• SoD Cash Receipts Questionnaire
• SoD Expenditures Questionnaire
• SoD Fixed Assets Questionnaire
• SoD Revenue (Hotel Industry specific) Questionnaire
• SoD Inventory Questionnaire
• SoD Payroll Questionnaire
• SoD Procurement Questionnaire
• SoD Purchasing and Payable Questionnaire
• SoD Revenue (General) Questionnaire
• SoD Controls (Accounting Applications) Questionnaire
• SoD Financial Controls Questionnaire
• SoD Treasury Questionnaire
• SoD Accounts Receivable Questionnaire
• SoD Financial Reporting Questionnaire

This tool is designed to ensure adequate and appropriate SoD in all critical business operations with an emphasis on financial and accounting integrity. Four areas are given special attention:

• Custody of Assets
• Transaction Approval
• Transaction Execution
• Recording and Reporting

Our questionnaires — along with all our SoD materials — remind management that no one employee should have unilateral control over financial transactions or financial reporting. Further, personnel who oversee transactions should not oversee the recording and reporting of those transactions.

Spot Conflicting Duties

Our questionnaire is also a segregation of duties template that acts as internal segregation of duties control. As one example, the questionnaire is completed by listing the names of individuals and the functions they’re responsible for in a table format. Once completed, it becomes easy to spot employees who have been assigned conflicting or incompatible duties.

Management might learn, for example, that an employee authorized to write checks is also involved in the bank reconciliation process. This is not optimal but it can’t be corrected until it’s realized. Spotting such conflicts is what this tool and our entire inventory of SoD tools help leaders do.

Spot Errors

Mistakes happen. Most, we would hope, are unintentional accidents or oversights. Some, unfortunately, are intentional and malicious. An SoD best practices process implemented with proven SoD tools, checklists, questionnaires and training is one of the best ways to spot errors and fix problems before they cause too much damage and cost too much money.

The best SoD tools make it easy to divide functional responsibilities between departments and individual employees. Fraud, in addition to erroneous errors, is bound to be reduced when the right tools are brought to bear.

Auditing for SoD

The final bulwark against fraud and error (among other things) due to poor SoD is a robust testing and audit regime.

Any risk or accounting audit program that does not test for appropriate SoD should be considered inadequate and be subject to immediate revision. All of KnowledgeLeader’s SoD tools are designed with this fact in mind.

Conclusion

It’s common knowledge among risk, audit and accounting professionals that segregation of duties is foundational to risk management. This knowledge, however, is not always easy to put into practice. Challenges are constantly arising to thwart your best efforts.

KnowledgeLeader encourages ongoing education, training and the use of high-quality accounting tools to help you maintain SoD and allow you to do your job as efficiently as possible.