Proper segregation of duties requires multiple staff each performing separate tasks of the same business process. The tasks are usually broken down along the lines of authorization, recording, custody, and reconciling. Segregation of duties hopes to achieve a higher level of assurance over reporting as it effectively prevents fraud and human error due to the number of people that the information has to pass through. For example, if we use the receivable/revenue process, one person will authorize a sale (salesperson) then will pass the information to an accounts receivable clerk who records the transaction. When the payment comes in a different employee will open the mail and record the receipt of payments (cheques, cash, or electronic fund transfer) and will give the physical asset to another employee who will keep custody. Finally, the last person will reconcile the process without having access to the other functions. If proper segregation is achieved, it will create a process that not only has multiple error checks along the way but also makes fraud or theft very hard to pull off.

You run into a segregation of duties issue when a person has two or more of the functions stated above and has the ability to conceal errors/omissions/fraud from other people in the company. A quick example of incompatible functions would be receiving the mail and opening it, recording payments, and reconciling to the ledger.

However, it becomes tricky to create an environment with proper segregation when your organization is limited in the number of people they employ. It should be noted to users of the financial statements that it is no less important in this environment to achieve an acceptable level of segregation, especially when you consider that, regardless of employee size, each enterprise will have the same minimum number of business processes (receivables and revenue, payables and purchases, and payroll).

Even in a small business, there are many options available to create an environment segregated by duties. IT is very important with regards to segregation and can do a lot of the work. Creating a system where employees must log in (authorization) to be able to utilize reporting functions ensures that they only have access to the functions their job position requires. Utilizing the receivables clerk for reconciling payables, and vice versa, is also an option as it means two different sets of eyes can scan the data for errors or omissions. When you are limited in the number of people you can utilize, you want to get everyone involved. For a general rule of thumb, if one person in your organization, even you, initializes part of a process, someone else should finalize it, followed by another person reconciling the whole process.

An example of a 3 employee operation creating segregation of duties would be:

Executive Director/Manager: sign checks, review bank reconciliations, initiate bank transfers
Employee 1: prepare deposit slips, approve and process vendor invoices
Employee 2: receive cash, disburse petty cash, authorize purchase orders and check requests, mail checks
Employee 3: write checks, reconcile bank and petty cash accounts, record accounts receivable and general ledger journal entries

Final notes:

1) The most important segregation for small organizations is making sure physical assets are secure, especially cash. Get a lock box if needed and make sure the person who takes deposits to the bank is not involved with recording or reconciling said deposits

2) If you don't have time to balance each process, ensure that the purchases/payables section is properly segregated as a person can create a fictitious company and start paying them for nothing – segregate purchasing and payment functions here.