How can checks and balances protect small businesses?

On Behalf of | Apr 2, 2024 | White Collar Offenses |

Small business owners have to do what they can to protect their company’s assets. Implementing internal checks and balances is one way they can work toward achieving this aim. The goal is to ensure that any internal illegal activity that occurs doesn’t continue unchecked.

Small business owners can choose from several options when implementing checks and balances. Ultimately, a company should choose solutions that are customized to the unique needs and circumstances of the business.

Segregation of duties

Segregation of duties ensures that no single individual controls all aspects of a financial transaction, from initiation to reconciliation. Small businesses can significantly reduce the risk of embezzlement, fraud and errors by dividing responsibilities among different employees. For example, separate the roles of personnel who authorize payments, disburse funds, and reconcile bank statements.

Regular audits and reviews

Audits can be conducted internally or by an external firm and are designed to rigorously test and verify the accuracy of financial records and ensure compliance with established policies and procedures. Reviews, whether scheduled or random, keep everyone aware that oversight is ongoing and inconsistencies will be noticed. These practices help to identify discrepancies that could indicate fraud, misuse of funds or accounting errors so they can be promptly addressed.

Access controls and authorization procedures

Effective access controls and authorization procedures include physical access to cash and inventory and digital access to accounting systems and financial records. Limiting access based on roles and requiring authorization for transactions above certain thresholds are ways to minimize opportunities for theft and fraud.

Transparent financial reporting

When employees know that financial records are regularly reviewed and discussed openly in team meetings, the perceived risk of being caught increases. Transparent reporting involves clearly communicating financial policies, sharing key financial performance indicators with relevant team members and fostering an environment where employees feel comfortable reporting anomalies.

Implementation of technology solutions

Technology solutions, such as automated accounting software, surveillance systems and transaction monitoring tools, can enhance the effectiveness of checks and balances. These systems can automatically flag unusual transactions, track inventory and monitor access to sensitive areas. Technology can also reduce the reliance on manual processes, which are more susceptible to manipulation and provide real-time data that is critical for timely decision-making and loss prevention.

Discovering that there’s illegal internal financial or asset activity occurring is a call-to-action for a business owner. This could include pursuing criminal or civil actions. Working with a legal representative who understands these matters and the importance of resolving effectively them can benefit companies that are navigating these difficult situations.