Explain the role of segregation of duties in fraud prevention.

• A. Dividing responsibilities to prevent one person from both perpetrating and concealing fraud.
• B. Centralizing responsibilities to improve efficiency.
• C. Rotating staff to confuse potential fraudsters.
• D. Outsourcing all control functions.

Answer: (A)

Segregation of duties is about dividing responsibilities so that one person cannot both initiate and conceal a fraudulent transaction. By splitting key steps—such as authorization, custody of assets, recording, and reconciliation—across different people, there are built-in checks and balances. This makes it much harder for someone to carry out fraud without others noticing.

For example, in a typical payment process, one person approves invoices, another handles the payment, a third records the transaction, and a fourth reconciles the bank statement with the accounting records. If only one person controlled all these steps, a fraudulent payment could move through quietly. With separation, discrepancies are more likely to be detected during reconciliation or independent reviews, and the opportunity to commit fraud is greatly reduced because no single individual has full control.

Centralizing responsibilities removes these layers of oversight and increases the risk that fraud goes undetected. Rotating staff can help with detection and reduce familiarity-based schemes, but it isn’t the primary mechanism for preventing fraud. Outsourcing all control functions would erode internal controls and diminish the organization’s ability to monitor and respond to irregularities.

The essence is that dividing duties creates checks, balances, and accountability, making it much harder to both commit and conceal fraud.