Internal Control/Anti-Fraud Program Design for the Small Business: A Guide for Companies NOT Subject to the Sarbanes-Oxley Act

CHAPTER 7 Control Activities The Segregation of Duties Dilemma

BUT I ONLY HAVE TWO EMPLOYEES

“Segregation of duties”: I cannot possibly count the number of times I have heard or uttered these words during my career. So what is segregation of duties? The principles of segregation of duties state that no single individual or group of individuals should have the ability to commit and also conceal a fraud. The duties that should always be segregated for sound internal control purposes are

• Custody of assets
• Authorization or approval of transactions affecting those assets
• Recording or reporting those transactions

Depending on the complexity of operations and number of employees in an organization, the number of employees needed to ensure a proper segregation of duties may, and probably will, outweigh the resources available to pay all of these employees. It would be quite easy for me to recommend to all organizations that they need at least 10 individuals in their accounting department. However, that is certainly not practical.

Those organizations that have only two employees cannot properly segregate duties. Because of this fact, I often hear, “Well, I only have two employees so I don’t need to worry about internal controls since it wouldn’t do me any good anyway.” To some extent, this statement is logical. But let me provide some hope. There is something we can do about this. ...