In this episode of THE SAMPLE Leita Hart-Fanta shares examples that show clearly what segregation of duties is not. What is segregation of duties?
Welcome to The Sample, a quick discussion of auditing concepts and terms that will help you do your work. Conducting an audit in accordance with auditing standards is no small feat and I want to support you. We’ll be referring to the GAO, IIA and AICPA literature to bolster our conversations. Let’s get started.
In this episode, we answer the question,” What is segregation of duties?”
An example of NO segregation of duties
Well, I think it’s going to help by showing you what it is not. I think it’ll be very clear what segregation of duties is not when I show you this example. So, let’s say that we are trying to make sure that cash collected on Sundays at church gets into the bank. And we have a bookkeeper named Marsha and she counts the contents of the baskets. And that she prepares a deposit, and she notifies the pastor of the amount collected, and she puts the cash and the checks in a zippered vinyl envelope and takes it home so that she can put it in the bank on Monday morning. She records a deposit in the general ledger. She reconciles cash to the bank balance and the general ledger every month. And then she reports on the financial status to the board of elders each quarter.
Uh oh. Marsha, Marsha, Marsha. There’s too much Marsha in that process!
Segregation of duties means that there are more people involved in the process, and they serve as a check and balance on each other. They kind of check on the validity of each other’s work. So, let’s have parishioners count the money. She can prepare the deposit, but then she and the parishioners tell the pastor how much was collected. And she can put the deposits in a nice zippered vinyl envelope, but she shouldn’t be taking that home. She puts it in a safe, and then the pastor makes a deposit. She can record the deposit in the general ledger, but then Alice reconciles cash to the bank balance each month.
Benefits of segregating duties
There’s lots of benefits to segregating duties. It reduces errors. Marsha could be making the same mistake over and over and over, and no one would ever know because she’s the only one looking at her own work. Maybe she’s taking $500 out of the collection plate every Sunday, and no one would be the wiser. So, it also helps reduce the risk of fraud. It relieves Marsha of the burden of taking care of a whole process by herself. And that can also reduce delays in the process. Like if Marsha is the only person that everybody can talk to about cash collections at church, sometimes they’re going to have to wait to get their answers. Or they’re going to have to wait to get that money deposited, because Marsha is the only one that can take care of it.
Division of tasks
I like to take the word segregation of duties, sometimes, depending on what I’m talking about, and I like to change it to division. And, to make it clearer, I say not segregation of duties, but division of tasks. Because segregation of duties, the word segregation has a negative connotation right there. But generally, when you’re talking to an auditor or an accountant about segregation of duties, they are thinking only about money. And that’s exactly how the COSO model treats this concept of segregation of duties. They’re really only talking about transactions. But division of tasks talks about other things that don’t have to do with money.
Segregation of duties: It’s not always about money
Now, this next process I’m about to show you does have some money involved, but it’s not all about money. I created a program for a university on the Public Funds Investment Act. That doesn’t matter. But what does matter is, at first, I was doing everything. I was registering the student for the class. I was conveying their password, taking their payment, communicating with the student, handling any issues that came up. So, if they lost their password, they couldn’t get into a module, didn’t pass the exam, grading their modules, conveying their certificate of completion, updating student records.
Now, two parts of this process so far I didn’t enjoy. One is that the student needed immediate responses when they had a problem. And so that meant I had to push aside all of my other work and pay attention to that problem, right? Another was updating student records. There were three places that I had to go and, you know, update their student information. And I put that off, boy, I put it off. I’d say,” Oh, I’ll take care of that later. Oh, I’ll take care of that later. I’ll take care of that later.” Later turned into six months… seven months. And when it was time for me to sit down and update the student records, when it became like critical that I do it, I forgot some stuff. Because I’d waited six months, right?
So that wasn’t good. Then I billed the university. And when I was doing everything, I didn’t have to do reconciliations. That’ll come up when I show you how we segregated duties here in a minute. And then I also updated the modules and created the modules, so that the content would be fresh and students would come back and use the system, use our program over and over again.
Now, when I first signed on, I thought that was all I was going to do, right? But that’s not what I ended up doing. I ended up doing all this stuff. And the more students we had, the more hectic it felt to me, and the more things were slipping through the cracks and students weren’t getting help, and the records were getting more ancient and out of date.
And I cried mercy at some point. I said,” Oh, help me. We’ve got to divide these tasks.” So, the university took on some roles. A couple of assistants, I hired a couple of assistants to take on some roles. And then I got back to what I really am best at. I’m an okay administrator, but I’m really good at creating content. That’s my best use of my professional time is doing that.
So, another benefit to dividing tasks is that it optimizes your resources. It puts the talent, or the skillset, on the tasks that they’re actually good at.
So, it’s not just about reducing fraud. It’s actually about thinking about your whole process and thinking, “Is this really the best person to be doing this?”
What does the Green Book state?
Segregation of duties in the COSO model in the Green Book, which is Standards for Internal Control in the Federal Government. It’s a slang term for Standards for Internal Control in the Federal Government. They both address segregation of duties. They address it in two parts of the model, but they think of it in money terms only, ultimately.
Let’s see what this says here: Management divides or segregates key duties and responsibilities among different people to reduce the risk of error, misuse or fraud. Separate the responsibilities for authorizing transactions, processing, recording transactions, reviewing transactions and handling any related assets. (See, it sounds like money, but it’s not always money.) So that no one individual controls all key aspects of a transaction or event.
In the control environment section of the COSO model, it also sounds like money. Separate authority, custody and accounting. All right? Again, though, not just about money. Lots of benefits to segregating duties, if you want to use that term, or dividing your tasks. And that includes smoothing out processes and reducing the risk of errors or fraud.
Want to know more?
Do you want to learn more about this topic and earn some hours? I suggest that you look at Internal Control offerings on our website. We have some self-study books about the Green Book Standards for Internal Control. We have some videos on the Green Book. Also classes on Fraud Awareness, which includes a discussion of controls. We have a bundle of products, which are videos and text. You’re welcome to join us for one of our webinars on Internal Controls. We have about four of those a year. And then I can also come in-house and do an Internal Controls Workshop for you and your team and your management, if you’d like.
And that wraps it up for another episode of The Sample. True to the nature of a sample, we didn’t talk about everything, so you’ve probably got questions. Write to me at firstname.lastname@example.org and I’ll do my best to fill in the blanks. Thanks for playing.