Hi, I’m Bette Hochberger, CPA, CGMA. When you’re running a small business, it’s easy for one person to wear too many hats—especially when it comes to finances. But even in small teams, it’s critical to put checks and balances in place. That’s where segregation of duties comes in.
Segregation of duties (or SoD) means splitting up key responsibilities so that no one person has control over an entire financial process. It’s a basic internal control that helps reduce errors, prevent fraud, and create accountability in your accounting system.
Why It Matters
If one person is in charge of recording transactions, writing checks, and reconciling the bank account, there’s a huge risk. Not only can mistakes go unnoticed, but there’s also potential for misappropriation of funds. Separating duties reduces those risks and builds a healthier, more transparent financial system.
The Core Functions to Separate
In accounting, the main areas to separate are:
- Authorization: Who approves transactions (e.g., purchases, expenses)?
- Custody: Who has access to the assets (e.g., bank account, inventory)?
- Recordkeeping: Who is logging transactions and maintaining financial records?
These roles shouldn’t overlap. For example, the person approving vendor payments shouldn’t also be the one cutting the checks or recording the expense.
How to Set This Up in a Small Business
You don’t need a big team to make SoD work—you just need smart structure.
- Use software to enforce separation. Accounting systems like QuickBooks or Xero let you assign user roles so certain team members can view, but not edit or approve, transactions.
- If you’re a solo business owner, have a third party (like your accountant or controller) review monthly reports and bank statements.
- For growing teams, assign roles clearly. One person handles invoices, another reconciles the bank account, and a manager signs off on payments.
Bonus Tip: Document Your Processes!
Write out who does what and create a simple approval workflow. This not only makes things clearer internally but also helps when onboarding new employees or going through a financial review.
Segregation of duties isn’t about bureaucracy—it’s about building trust in your numbers. When you set up your accounting function with these controls in place, your business becomes stronger, safer, and more scalable.
I hope you all learned something new today, and I’ll see you next time!
