For every business a major component in avoiding fraud is establishing sustainable risk management and internal controls. When establishing these, a key factor is developing a strong segregation of duties (SOD). The concept of SOD is centered around the separation of critical functions of the business to more than one person or department of the business. This serves to ensure that multiple eyes fall on each decision, working to eliminate one of the three elements of the fraud triangle: opportunity, incentive, and rationalization. Without one of these elements the chance of fraud is reduced.
Implementation of Segregation of Duties
When implementing SOD a major key is to have an established process of activities and sticking to this process. The main principle in establishing segregation of duties is establishing different individuals or departments for each of the following duties:
- Custody of assets
- Authorization of transactions affecting those assets
- Recoding of related transactions
Eliminating the centralization of duties under a single person or department reduces the likelihood of fraud and errors occurring. For example, the act of purchasing and paying for inventory or materials, the authorization of inventory purchases and the activity of recording the purchase into the books should be completed by separate employees or departments. This will create a business environment with a lower opportunity of fraud as it subjects each group to checks and balances similar to how the government works.
An activity completed by one person should not also be reviewed by the same person for fraud and errors. Review should be completed by another individual or department to check for possible errors, intentional or unintentional.
SOD may appear as a simple and easy concept but don’t let that take away from its importance SOD plays a major role in avoiding fraud and can save companies from the headache of errors and loss of money. Make sure to take a moment and re-evaluate your own internal controls to ensure they are protecting you and your money!