Segregation of Duties.Proper segregation of duties ensures that no single individual or department processes a transaction in its entirety. The number of employees in the organization and the volume of transactions being processed will influence how tasks are divided. In general, the following three rules apply:
• Rule 1. Transaction authorization should be separate from transaction processing. For example, within the revenue cycle, the credit department is segregated from the rest of the process, so that the formal authorization of material transactions is an independent event. The importance of this separation is clear when one considers the potential conflict in objectives between the individual salesperson and the organization. Often, sales staff compensation is based on their sales levels. To achieve their personal objective of maximizing sales volume, sales personnel may not always consider the creditworthiness of the prospective customer. The credit department, acting as an independent authorization group, detects risky customers and discourages poor and irresponsible sales decisions.
• Rule 2. Asset custody should be separate from the record-keeping task. In the sales order processing system, the inventory warehouse clerk with custody of the physical assets should not also maintain the inventory records. Similarly, the cash receiptsclerk (with custody of cash) should not record accounts receivable.
• Rule 3. The organization should be so structured that the perpetration of a fraud requires collusion between two or more individuals. The record-keeping functions must be carefully divided. Specifically, the subsidiary ledgers (AR and inventory), the journals (sales and cash receipts), and the general ledger should be separately maintained. An individual with total record-keeping responsibility, in collusion with someone with asset custody, is in a position to perpetrate fraud. By separating these tasks, collusion must involve more people, which increases the risk of detection and is, therefore, less likely to occur.