What is segregation of duties?

Definition

Segregation of duties is the practice of splitting a process so no one person can request, approve, and pay the same item. It is not an account on the Balance Sheet.

It is a design choice about who does which step. One person may ask to buy bread, a different person signs, and a third person sends the check.

The split is the control. The later journal still records the purchase as usual, once the right people have done their parts.

Where it shows up

Balance Sheet: Related to nothing extra.

P&L: Related to nothing extra.

Cash flow: Related to nothing extra.

See also: Internal Controls · Approval Workflow · Audit Trail

You will not see segregation of duties as a line on the Balance Sheet. It does not sit in assets, liabilities, or equity.

You also will not see it on the Income Statement or the Statement of Cash Flows. Those reports show the purchases and payments that already happened, not the split of who did each step.

In day-to-day books, you meet the split in the file. The name on the purchase order should not be the same name that signs the check in the check run.

The split does not post itself. It only decides which hands may touch which step before cash leaves.

How it works

A purchase has a few distinct jobs. Someone requests the item, someone approves it, someone records the bill, and someone pays it.

Segregation of duties assigns those jobs to different people. The baker may request flour, the manager may sign, the bookkeeper may record the invoice, and the owner may send the payment.

The point is that one person cannot complete the path alone. If the same person could order, approve, and pay, a bad buy or a fake vendor would be hard to catch.

Small teams still split what they can. A two-person cafe cannot hire four people for every purchase, but it can still keep the person who orders from being the only signer on the check.

The split should be visible later. Who requested, who signed, and who paid should stay on the file so a reviewer can see that the jobs were not combined.

A bank reconciliation is a common second check. The person who signs checks should not also be the only person who matches the book cash to the bank statement.

When the split is skipped, the usual fix is to stop payment and add the missing person. Accounts payable should not be paid until a second set of eyes has seen the buy.

Example

A cafe baker orders bread from the bakery each week. The baker may request the loaves, but the baker cannot sign the bakery check.

The manager reviews the order against the delivery. The owner signs the check, or the manager signs and the owner reviews the check run.

No journal is made for the split itself. Cash leaves later, when the bakery is paid, and that later entry is the purchase, not the duty split.

If the baker both ordered the bread and signed the check, a leftover or a padded order would be easy to hide. The split's job is to make that path impossible.

The same idea applies to petty cash and cards. The person who holds the cash box should not also be the only person who counts it at month end.

Common mix-ups

Segregation of duties is not the same as an approval workflow. The workflow is the path a request travels, while the split is the rule that the person at one step cannot also sit at the other steps.

Segregation of duties is not a spend policy. The policy says what may be bought and what proof is required, while the split says who may do which job on that buy.

Segregation of duties is not the same as having two people in the building. Two people who can each do every step have not split the jobs, because the split only works if each person is blocked from at least one step.

Related terms

• Internal Controls: The procedures that keep the books accurate and assets protected.
• Approval Workflow: The routing of a request or bill through the people who must sign off.
• Check Run: The scheduled batch in which approved vendor bills are paid.
• Duplicate Payment: Paying the same vendor bill twice.
• Audit Trail: The traceable chain from a reported number back to its source document.
• Bank Reconciliation: Matching the book cash balance to the bank statement and explaining every difference.
• Spend Policy: The written rules for what employees may buy and how it must be approved.
• Petty Cash: A small on-hand cash fund used for minor purchases and reimbursed on a set schedule.