October 25, 2023, LinkedIn

Segregation of Duties (SoD) is a crucial measure for internal control and risk management within organizations, serving as a cornerstone for effective risk management and ensuring the integrity of financial and operational processes.

The goal of SoD is to create a system of checks and balances that reduces the risk of misconduct or errors. This practice entails distributing critical tasks and responsibilities among individuals or teams to prevent fraud, errors, and other irregularities. This prevents anyone from having unchecked authority over a vital function or process.

By Sankaran Krishnan, Assistant Vice President- Delivery, Path Infotech

Fundamental principles of segregation of duties include:

Authorization: Different individuals or roles should authorize, execute, and review transactions or processes. For example, the person who initiates a financial transaction should be different from the person who approves it.

Custody: The individuals with access to or control over assets, information, or resources should differ from those with the authority to approve or initiate transactions involving those assets. For instance, the person handling cash should vary from the person reconciling cash records.

Recordkeeping: The responsibility for maintaining records or documentation related to a process should be separate from those responsible for the execution and authorization of that process. This separation ensures that documents are accurately maintained without bias.

Review and reconciliation: Independent individuals should periodically review and reconcile transactions and records. This helps detect and prevent errors or irregularities during the process.

In practice, organizations implement SoD by defining and documenting specific roles and responsibilities, establishing policies and procedures, and using information systems and technology to enforce the segregation of duties. Auditors often assess an organization’s SoD controls to ensure compliance with regulations and to mitigate risks.

Why is SOD important in terms of risk management?

  • Fraud Prevention: SoD acts as a deterrent against fraudulent activities.
  • Error Detection: It allows for the independent verification of transactions and operations, enabling the timely detection and correction of errors or discrepancies.
  • Risk Mitigation: SoD minimizes the risk of operational failures.
  • Compliance: Many regulatory frameworks and industry standards mandate the implementation of SoD to ensure financial and operational transparency.
  • Asset Protection: SoD safeguards an organization’s assets, including financial resources, sensitive information, and intellectual property.
  • Trust and Accountability: It fosters trust among stakeholders, including shareholders, investors, and customers, by demonstrating that the organization has sound internal controls.
  • Operational Efficiency: While SoD adds layers of control, it can also improve operational efficiency by ensuring that tasks are allocated to individuals with the appropriate expertise, reducing the likelihood of bottlenecks or delays.

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Disclaimer: The content presented in this blog post is sourced from Sankaran Krishnan’s original LinkedIn blog.