Segregation of Duties
Unveiling The Concept of SoD
Separation of Duties can be termed as the “Internal Control” designed for preventing error and fraud.
It involves the assignment of multiple people to complete a certain task. This way no person is the sole in-charge of a job. This concept emerged way back in the 16th century with the separation of the church and state in Europe.
If this concept of segregation of duties is implemented in the political realm, then it is referred to as the separation of power. For example, a legislature, judiciary and an executive that can be termed as the model for the governance of the state.
SoD actually limits the power of one person and tends to restrict that person so that he does not misuse his power to conduct any fraud.
Exploring The Concept of Segregation of Duties
The Segregation of Duties can also be termed as the Separation of duties.
This concept can be understood better by considering the Payroll management. The Payroll management can be defined as the management area in which both the error and fraud can be termed as risks.
Now SoD can be defined for a Payroll system as well. In such a case one person is made responsible for the accounting of the job while the other person deals with the signing of the checks.
Sometimes companies break up the tasks in a way that some employees need to manage the issuing of the invoice while some other employees manage the checking of the invoice.
Now if we try to understand SoD with the perspective of an organization, then it is important to note the fact that every company has a defined tolerance level. Segregation of Duties controls those irreversible risks that can harm the foundation of an organization.
There are two main objectives of SoD: One is to detect the control failures, and the other objective is to prevent the conflict of interest.
The absence of SoD can have catastrophic results.
When an organization has to sketch out the SoD, then there are four basic classifications. It includes authorization, the custody, record keeping and the reconciliation. Authorization involves the review and the transaction approval. Custody involves the process of access. The record keeping involves keeping track of the records and reconciliation involves the verification of the transactions to ensure that all the executed transactions are completely valid. This classification is of a more generalized nature and may vary from company to company.
How an Organisation Should Check Out Its SoD?
Now certain tests can be performed to check if the segregation of duties is performed effectively in an organization.
- The first test should be to check out if one person has the authority to alter financial data without being identified.
- The second test should be focused on checking out if a person can easily steal any sensitive information.
- The last and final test should be to figure out if any individual has the control over the design, the implementation and the reporting.
If the response to all these things is in affirmative, then this means that an organization needs to look over its segregation of duties.
Understanding The Importance of Segregation of Duties
Segregation of duties ensures business compliance that is essential for the safe execution of business.
When a business strongly follows the compliance procedures, then this eliminates the potential loopholes. Moreover, it becomes easier for a company to overcome hidden costs. For example, if SoD is non-existent in an organization, then this results in the loss of shareholder value. The absence of segregation of duties results in a significant decrease in the rating of the company as well.
Additionally, the company may have to bear compensations and fines as well.
When an effective risk management system exists in a company, then it is not quite a problem to prevent the personal liability. It is also crucial to note down that SoD is mandatory in both large-scale businesses and small businesses as well. This is why small businesses need to come up with a SoD strategy as well.
There is no denying the fact that SoD plays a crucial role in improving the security and helps in breaking the tasks into the separate components. However, this can have its set of negative impacts as well, so an organization needs to evaluate them as well.
This can add up to the complexity of the business. Additionally, this can impact the efficiency of business and lead to an increase in the costs. Moreover, this practice may require additional staffing requirements as well. This is why an organization has to consider all these factors before deciding to implement the Segregation of Duties, and this will be the smart approach.
There are times when accepting, rejecting or diverting a risk is a much better option in comparison to controlling the risks through Segregation of duties.
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