In an increasingly complex and regulated environment, segregation of duties remains one of the most fundamental and effective internal controls an organisation can implement to protect itself from fraud, corruption and undetected errors. While often considered a basic principle, the consequences of failing to enforce proper segregation of duties can be severe, ranging from financial loss to reputational damage and regulatory sanctions.
What is Segregation of Duties?
Segregation of duties refers to the separation of key responsibilities among different individuals to prevent any single person from having unchecked control over critical organisation processes. The core idea is simple: no employee should be able to both perpetrate and conceal an error or fraudulent act.
Typically, segregation of duties divides responsibilities into three primary functions:
- Authorisation – approving transactions
- Custody – handling assets (e.g., cash or inventory)
- Recording – maintaining financial records and reporting
If these duties are performed by the same individual, it creates an environment ripe for abuse, where fraud, corruption and errors can occur without detection.
Risks When There is No Segregation of Duties
Failure to implement segregation of duties opens the door to significant risks across several key areas of an organisation. We have provided some examples where segregation of duties is critically important.
1. Finance and Accounting
One of the most vulnerable functions, finance is often where the absence of segregation of duties leads to fraudulent activities such as:
- Embezzlement: When an employee can both initiate and approve payments, they may process false invoices or misappropriate funds.
- Falsification of records: If the same person handles both recording and reconciliation, they can conceal discrepancies or fabricate entries.
- Asset misappropriation: When staff can access both cash and accounting records, theft can be easily hidden.
Example: In many small organisations, the same individual may issue invoices, record receipts and reconcile bank statements. Without oversight, this creates a serious risk of funds being diverted or misreported.
2. Procurement and Supply Chain
Procurement is another area prone to fraud if segregation of duties is not enforced:
- Conflict of interest and kickbacks: When the same individual selects vendors, approves contracts, and processes payments, they may engage in corrupt relationships with suppliers.
- Inflated or fictitious invoices: Lack of independent review can result in overpayments or payments to non-existent vendors.
Example: A procurement officer who has control over vendor selection and payment authorisation could approve invoices for goods not received, especially in environments where delivery is not independently verified.
3. Payroll and HR
- Ghost employees: Without segregation of duties, one person could create fictitious employees and process salaries to themselves or accomplices.
- Unauthorised pay adjustments: When HR and payroll functions are not separated, staff may award themselves bonuses or benefits.
Example: If a payroll officer is responsible for both entering new employees and processing payroll, ghost employees could be created and paid without detection.
4. Information Systems and Systems Access
In today’s digital environment, the segregation of systems access is just as critical as in finance:
- System manipulation: An IT staff member with access to both system configuration and transaction data could manipulate financial results.
- Data breaches: Poor access control and a lack of role-based permissions increase the risk of unauthorised access or misuse of sensitive data.
Example: An employee with admin rights and transactional capabilities in an ERP system can both process and cover up fraudulent transactions.
Why Organisations Overlook Segregation of Duties
Despite its importance, segregation of duties is often overlooked due to:
- Resource constraints: In smaller organisations, limited staff means one person may perform multiple roles. Management does not understand the risks and don’t have adequate oversight of this staff members activities. Without oversight this staff member can commit fraud, corruption and errors which won’t be detected.Â
- Over-reliance on trust: Organisations sometimes place too much trust in long-serving employees, neglecting adequate controls.
- Lack of awareness: Some organisations don’t fully understand how duties should be separated or the risks involved with a lack of segregation of duties.
However, convenience or cost-cutting should never come at the expense of effective internal controls.
Segregation of Duties Myth Busting
Common myths about segregation of duties include:
Myth Number 1: “Segregation of duties is only for large organisations.”
Reality: Fraud and errors can occur in any organisation, regardless of size. While smaller companies may face more challenges implementing segregation of duties, alternative controls (e.g., increased supervision or periodic reviews) can help mitigate risks.
Myth number 2: – “Segregation of duties only about finance and accounting.”
Reality: Segregation of duties applies across many functions: IT, procurement, HR, operations and more. For example, in IT, separating system administration from security roles is critical.
Myth Number 3. “We use software systems, so we don’t need segregation of duties.”
Reality: Technology helps enforce segregation of duties, but systems can be misconfigured, bypassed, or accessed by insiders. segregation of duties still needs to be designed and monitored,even with automation.
Myth Number 4: “If someone is trustworthy, segregation of duties doesn’t matter.”
Reality: Trust is not a control. segregation of duties protects both the organisation and the individual by reducing opportunity and perception of wrongdoing, whether intentional or accidental.
Myth Number 5: “Segregation of duties is only about preventing fraud.”
Reality: While fraud prevention is a major goal, segregation of duties also reduces the risk of unintentional errors, data manipulation, system misconfigurations, and process inefficiencies
Myth Number 6. “One person can’t do all steps in a process, so we’re fine.”
Reality: Just because someone doesn’t do everything doesn’t mean they can’t. Segregation of duties is about access and ability, not just behaviour.
Myth Number 7. “We’ve documented segregation of duties in policy, so that’s enough.”
Reality: Documentation is only the first step. Without enforcement, monitoring and regular review, segregation of duties controls is ineffective.
Myth Number 8. “Segregating duties means hiring more people.”
Reality: While resource constraints are real, segregation of duties can be maintained through role-based access control, workflow approvals, cross-training with rotation, and periodic audits or peer reviews. It doesn’t have to mean employing more people.
Myth Number 9. “Segregation of duties is a one-time project.”
Reality: Organisation processes, systems, management, staff and rationalisation for fraud change. Segregation of duties needs to be continually reviewed and adapted over time to ensure that the controls are effective.
Myth Number 10. “My financial audit will catch fraud anyway.”
Reality: The objective of financial audit is not to identify fraud, and this is a common expectation gap with the financial audit. Auditors may not catch all segregation of duties conflicts, especially if they’re subtle or not enforced in practice. Internal controls are the organisation’s responsibility first.
Strengthening Segregation of Duties
To effectively enforce segregation of duties, organisations should:
- Map critical processes – Identify where key duties overlap and assess the level of risk.
- Assign clear roles and responsibilities – Ensure that duties are divided appropriately, with no single person controlling an entire process.
- Implement compensating controls – Where segregation is not possible, use monitoring, independent reviews, or automated controls to reduce risk.
- Perform data analytics – Perform tests of your data to understand if there are any risk factors which appear to be a fraud risk.Â
- Conduct regular audits – Internal or external audits can help identify weaknesses in segregation of duties and recommend improvements.
- Use technology – Role based access controls, automated approval workflows and activity logs can reinforce segregation of duties in digital systems.
Segregation of duties is more than an accounting best practice it is a vital safeguard against fraud, corruption, operational failure and errors going undetected. While it may seem straightforward, the absence of segregation of duties can have far-reaching consequences across an organisation. As such, leadership must treat segregation of duties not just as a compliance checkbox, but as a core element of sound governance and risk management.
A strong culture of accountability, combined with well designed processes and oversight, ensures that no individual has excessive control and that your organisation is better protected against the internal threats that are often the most damaging.
Moore Australia can perform a review of your policies and procedures and ensure that you have adequate segregation of duties within these governance documents that are fit for purpose for your organisation and not onerous to maintain. We can perform data analytics and review the supporting documents supporting your transactions to identify any lack of segregation of duties and anomalous transactions in your organisation.Â
Speak to one of your Moore Australia Governance and Risk Advisory or Forensic Services Team Members today.
