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34.2 Segregation of Duties in Small Businesses

Overview​

Segregation of duties is a fundamental internal control principle that separates incompatible functions. In small businesses with limited staff, achieving ideal segregation is challenging, but practical alternatives can provide effective control.

Segregation of Duties Principle​

Incompatible Functions​

Incompatible Functions Should Be Separated:

  • Authorization: Approving transactions
  • Recording: Recording transactions in accounting
  • Custody: Handling assets (cash, inventory)
  • Reconciliation: Verifying records

Ideal Segregation​

Ideal Situation:

  • Different people perform authorization, recording, custody, reconciliation
  • No single person controls entire process
  • Independent verification
  • Reduced fraud risk

Small Business Challenges​

Limited Staff​

Challenges:

  • Few employees
  • Owner performs multiple functions
  • Difficult to separate duties
  • Cost of additional staff
  • Practical limitations

Practical Solutions​

Solutions for Small Businesses:

  • Owner oversight: Owner reviews and approves
  • Rotation: Rotate duties when possible
  • Technology: Use technology for controls
  • External review: Periodic external review
  • Compensating controls: Additional controls

Practical Approaches​

Owner Oversight​

Owner Involvement:

  • Owner reviews all transactions
  • Owner approves significant transactions
  • Owner reconciles accounts
  • Owner monitors operations
  • Owner provides independent verification

Duty Rotation​

Rotation:

  • Rotate duties among employees
  • Cross-train employees
  • Prevent single person control
  • Provide backup
  • Reduce risk

Technology Controls​

Technology:

  • Automated controls
  • System restrictions
  • Access controls
  • Audit trails
  • Automated reconciliations

External Review​

External Review:

  • Periodic accountant review
  • External audit (if required)
  • Independent verification
  • Professional oversight
  • Additional control layer

Compensating Controls​

What Are Compensating Controls?​

Compensating Controls:

  • Additional controls that compensate for lack of segregation
  • Provide alternative protection
  • Reduce risk to acceptable level
  • Practical for small businesses

Examples​

Compensating Control Examples:

  • Owner review and approval
  • Regular reconciliations
  • Surprise audits
  • Bank statement review
  • Vendor statement review

Luxembourg Compliance Note​

Legal Requirements:

  • Segregation of duties: Required where possible
  • Compensating controls: Acceptable when segregation not possible
  • Owner oversight: Owner responsibility for controls
  • Documentation: Document control procedures
  • Review: Regular review of controls

Small Business Considerations:

  • Practical approach: Implement practical controls
  • Owner involvement: Owner oversight is critical
  • Documentation: Document compensating controls
  • Regular review: Review controls regularly
  • Continuous improvement: Improve controls as business grows

Think It Through​

Artisan Boulangerie has Sophie (owner) and 2 employees. One employee handles cash and records sales. How can they implement segregation of duties? What compensating controls can be used?

Concepts in Practice​

Segregation of Duties in Small Business

TechLux Solutions (5 employees):

Ideal Segregation (where possible):

  • Authorization: Owner approves purchases >€500
  • Recording: Accountant records transactions
  • Custody: Office manager handles cash
  • Reconciliation: Owner reconciles bank monthly

Compensating Controls:

  • Owner reviews all transactions weekly
  • Monthly bank reconciliation by owner
  • Surprise cash counts
  • Vendor statement reviews
  • Regular accountant review

Result: Practical segregation where possible, compensating controls where not, effective risk management.