How to Create Checks and Balances
Some employees steal. Checks and balances in business make it harder for thieves to work undetected. If, say, the person who handles the cash also does the bookkeeping, it's easy to embezzle and cover it up. Separating the two responsibilities is a simple, effective checks and balances example.
The term "checks and balances" comes from the American theory of government. The Founding Fathers believed that dividing the government's power between the president, the Supreme Court and Congress would create a balanced system where one individual couldn't seize all the power.
Similarly, checks and balances in business divide up certain responsibilities. One person manages the money, someone else checks that the books balance. One person orders stock for your store, someone else checks that the inventory is actually there. Checks and balances in accounting often involve an outside party going over your finances.
The importance of checks and balances is that they make it harder to commit fraud, and easier to find the culprit after fraud happens.
The first step in setting up checks and balances in business is to identify the places where you might need them. Don't assume that just because your employees have been with you from the start, they can't be up to anything: long-term, trusted employees are behind many cases of internal theft and fraud.
Take a good look at how your company operates: who orders inventory, who writes checks, who makes deposits, who reconciles the cash register to the sales receipts. If one person is in charge of every part of a transaction, you've found a vulnerability.
Go over any checks and balances you already have in place and confirm you actually follow them. Reconciling your bank statement every month is a basic check and balance. If the statements are sitting on your desk and you never get around to reviewing them, that's another weak point.
Once you identify the places where fraud could take place, introduce procedures to prevent it. Some standard checks and balances examples include:
- Divide up responsibilities. The person who deposits money should not be in charge of recording deposits. The person who authorizes spending shouldn't be the person who writes the check.
- Review your paperwork. Go over your bank statements to see if there are checks you can't explain. Reconcile the statement with the checkbook.
- Check inventory. Inventory theft is a common source of loss. Regular inventory counts can show you if everything that's supposed to be on the shelves is actually there.
- Restrict access. Nobody should be authorized to make credit purchases unless it's necessary. Go over credit card statements the same way you do the bank statement. Likewise, restrict access to petty cash to employees who genuinely need it, and track how the money is used.
- Pay for an audit. An outside auditor can look at your business with fresh eyes and spot problems you might be blind to. This is particularly important as your business grows and its finances become more complex. Auditors also look at whether your employees actually follow the loss-prevention procedures.
Checks and balances in business shouldn't be secret. Your goal shouldn't be to surprise and trap crooked employees but to encourage them to stay honest. If they know that their transactions are watched, they have an incentive not to cheat.
They also need to know that you're serious about stopping fraud. Checks and balances won't do any good if you don't act on information. If a problem turns up, or an employee blows the whistle on something they've spotted, you need to investigate. Following up every lead and suspicion is the best way to go.