Segregation of Duties and the Fraud Triangle

The fraud triangle

• —Pressure — a genuine personal or financial motive: debt, an addiction, an unmet target.
• —Opportunity — the actual ability to commit and conceal it: weak controls, excessive unchecked access.
• —Rationalisation — the story that makes it feel justified: “I’ll pay it back,” “I’m underpaid anyway.”

Controls cannot touch pressure or rationalisation — both live inside a person’s own circumstances and mind. Opportunity is the one leg genuinely within a business’s structural control, so that is where control design aims.

Four roles that should never collapse into one

The principle applies across the whole finance function — sales, purchasing, payroll, banking — not just procurement:

• —Whoever creates a transaction (raises a PO, processes a payroll change) differs from whoever approves it.
• —Whoever approves it differs from whoever records it in the books.
• —Whoever records it differs from whoever reconciles it — the bank reconciliation, the subledger-to-control check.
• —Whoever has physical custody of an asset (cash, inventory) differs from whoever maintains its records.

It is structural, not a judgement about anyone

Segregation of duties is not a statement that a particular person is suspected of dishonesty. It is a design that makes fraud require collusion rather than being achievable by one person acting alone.

That is a dramatically higher bar: collusion needs multiple people willing to risk detection together, which is harder to arrange and more likely to eventually surface.

It also protects honest employees. Where no single person could have acted alone, no single person can be wrongly suspected for something outside their control.

What a small team actually does

With eight employees in total, does segregation of duties simply become impractical and get abandoned?

No. Small size makes full segregation across every process harder — it does not make the principle optional. The workable answer is to apply it where it matters most (high-value, high-risk steps such as supplier onboarding and payment approval) and to compensate for thinner segregation elsewhere with stronger detective controls — for example the owner personally reviewing specific reports on a regular cycle.

Smaller businesses adapt the principle to real constraints. They do not discard it.

Honest error or fraud?

On the surface they look alike: a duplicate bill, a misclassified amount — a number that is wrong, found by a control.

The difference is intent and evidence. An honest mistake is confirmed as such through ordinary investigation. A genuine fraud shows deliberate concealment — altered documents, fabricated approvals, a pattern designed to evade the very controls meant to catch it.

The response differs sharply. An error is corrected and the process improved. Suspected fraud requires a formal, often legally sensitive investigation, usually escalated beyond the finance team — which is exactly why the distinction should be reached through evidence, not assumed in either direction.

Common mistakes

• —Applying segregation to purchasing only, leaving payroll and banking untouched.
• —Treating segregation as an accusation and softening it to avoid offending someone.
• —Letting the person who records transactions also perform the reconciliation.
• —Separating duties on paper while one person holds system access covering all of them.
• —Abandoning the principle entirely because the team is too small for full coverage.
• —Jumping to a fraud conclusion, or dismissing one, before the evidence supports either.