Segregation of Duties in AP

Segregation of Duties: A Key Strategy to Shield Your Business from Fraud



Accounts Payable (AP) is a critical accounting function that settles short-term debts to suppliers. Segregation of duties in AP is essential for financial health and integrity, reducing fraud, errors, and improving efficiency and effectiveness. By segregating the tasks of authorizing payments, approving invoices, and making payments, businesses can reduce the opportunity for one individual to commit fraud or make unauthorized payments.

What Does Segregation of Duties Mean?

Segregation of Duties (SoD) is an internal control strategy where different tasks and responsibilities are distributed among various individuals or departments. The idea is to avoid any single point of failure or fraud by ensuring that no single individual has control over all aspects of any critical financial transaction.

What Are Internal Controls in Accounts Payable?

Internal controls in Accounts Payable include a set of procedures, policies, and practices designed to safeguard the company's assets, enhance the accuracy and reliability of financial records, and promote operational efficiency. Examples include approval workflows, automated matching of invoices to purchase orders, and periodic reconciliations.


The Obligation to Pay

The obligation to pay arises when goods or services have been received but not yet paid for. In the AP department, controls should be in place to ensure that payments are only made for legitimately incurred obligations. This is where segregation of duties comes in handy.


Data Entry

Data entry involves the input of invoice details into the accounting system. This should be separate from the roles that involve approving the invoices and making the payments to avoid any potential conflict of interest or fraud.


Invoice Payment

This involves the actual disbursement of funds. A different set of eyes should be responsible for this part, ensuring that only approved and accurate amounts are paid out.


Which Duties Should Be Segregated?

At the very least, the following duties should be segregated:

- Invoice approval

- Data entry

- Payment authorization

- Payment disbursement


Examples of SoD

1. Person A is responsible for receiving and verifying invoices.

2. Person B approves the invoices.

3. Person C enters the invoice data into the accounting system.

4. Person D is responsible for authorizing and executing the payment.

Advantages and Disadvantages of Implementing SoD



1. Reduced Risk of Fraud: Multiple layers of control make it difficult for unauthorized transactions to occur.

2. Error Minimization: The probability of human error diminishes when more than one person is involved in a process.

3. Improved Accountability: Clearly defined roles and responsibilities make it easier to trace irregularities.

4. Enhanced Compliance: Meeting regulatory requirements becomes more manageable with a structured SoD framework.



1. Increased Operational Costs: Having multiple people involved in a process can lead to increased staffing needs, which in turn drives up costs.

2. Complexity in Coordination: With duties divided among multiple individuals or departments, keeping everyone on the same page can become a challenge.

3. Potential for Delays: More checks and balances could slow down the processing time, particularly if not well-coordinated.

Implementing Accounts Payable SoD for a Stronger Financial Future


Implementing a SoD framework within your AP department is a prudent strategy for optimizing financial operations. It not only fortifies your company against fraud and errors but also sets the stage for a stronger financial future. Below is a comprehensive guide on how to best implement this system.


Step 1: Conduct a Risk Assessment

Begin by evaluating your current AP processes to identify potential areas of risk. Are there points in the process where a single person has too much control? Are there adequate checks and balances? This initial risk assessment will guide the design of your SoD framework.


Step 2: Define Roles and Responsibilities

Clearly outline the roles involved in the AP process, from invoice receipt to payment disbursement. Here's a suggested division:


1. Invoice Receipt and Verification: The role involves receiving invoices and verifying them against goods received notes and purchase orders.

2. Invoice Approval: Responsible for approving verified invoices for payment.

3. Data Entry: Enters approved invoices into the accounting system.

4. Payment Authorization: Reviews entered data and authorizes payment.

5. Payment Execution: Executes the actual payment.

Some of the above roles can be combined - the general recommendation is that approvers and payers cannot be responsible for data entry.


Step 3: Segregate Duties

Ensure that each of the roles defined above is filled by a separate individual or department. No one person should have the ability to control more than two of these critical areas.


Step 4: Implement Internal Controls

Utilize internal control mechanisms like dual authorizations, approval limits, and automated workflows. Ensure that these controls align with your newly segregated duties. AP software helps automate internal controls.


Step 5: Document Processes and Policies

Document the new processes and policies clearly. Make sure these documents are easily accessible to all relevant personnel.


Step 6: Train Staff

Training is critical for seamless implementation. Ensure that all team members understand their new roles and responsibilities, along with the importance of these changes.


Step 7: Monitor and Review

It's important to regularly monitor the effectiveness of your SoD framework. Use periodic audits, and review key performance indicators(KPIs) to ensure compliance and efficacy.


Step 8: Leverage Technology

Consider using procure-to-pay software to automate and streamline the AP process. These systems often have built-in controls that can aid in the effective segregation of duties.


Step 9:Review and Update

Regulatory environments and business needs change. As such, make it a point to regularly review and update your SoD framework to keep it relevant and effective.


Step 10:Communicate with Stakeholders

Keep all stakeholders, including management and external auditors, informed about the changes, why they are necessary, and the benefits they bring.

Cost Considerations and How Starkmont Can Help

While implementing segregation of duties in-house can be costly, Starkmont can help businesses reduce costs while maintaining compliance. Our comprehensive AP services include a full SoD framework, delivered by a team of experts trained in the latest best practices and using state-of-the-art software.

By outsourcing your AP functions to Starkmont, you can mitigate risks, achieve operational excellence, and save money. Talk to us today to see how we can simplify your business processes.


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