Segregation of Duties

Definition

The Segregation of Duties (also Two-man rule) is long standing and widely used Internal Control mechanism that requires that responsibilities of individuals within an organization must be structured so as to limit potential conflicts of interest.

Objective

The objective of the control is to mitigate risks primarily of the following two types:

• Internal Fraud, adverse outcomes as the result of fraudulent action of persons internal to the firm
• Legal Risk, losses arising from an unintentional or negligent failure to meet a professional (legal) obligation to specific clients (including fiduciary and suitability requirements)

Examples

• Simultaneous front and back office control by one individual
• Approval of the disbursement of funds and the actual disbursement
• Commingling of customer and proprietary (own) accounts
• Transactions in both the "banking" and "trading" books
• Informally providing information to customers about their positions while marketing to the same customers
• Assessing the adequacy of loan documentation and monitoring the borrower after loan origination

Issues and Challenges

• The lack of sufficient depth in implementing check and balances is related also to Key Person Risk

See Also

• Four Eyes Principle

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