Compensating Controls For Small Governments

If your entire main office consists of one or two people, you already know this truth:

Traditional segregation of duties isn’t always possible.

And that doesn’t mean you’re doing anything wrong.

Small governments operate with limited staff, tight budgets, and a lot of responsibility. The goal isn’t perfection. The goal is reducing risk in reasonable, defensible ways.

That’s where compensating controls come in.

What Are Compensating Controls?

Compensating controls are alternative procedures that help reduce risk when ideal segregation of duties can’t be achieved.

They don’t eliminate risk entirely—but they:

• Increase oversight

• Improve transparency

• Make errors and fraud easier to detect

• Strengthen accountability

For small governments, compensating controls are often the only practical option—and auditors understand that.

Why Compensating Controls Matter More in Small Offices

When one person:

• Records transactions

• Handles cash

• Processes payroll

• Reconciles bank accounts

There is a higher risk that:

• Errors go unnoticed

• Misstatements linger

• Problems are discovered late

Compensating controls help balance trust with verification—without adding staff.

The Most Effective Compensating Controls for Small Governments

1. Independent Review by Someone Outside Day-to-Day Accounting

Even if that person isn’t an accountant, review still matters.

Good reviewers include:

• Administrator or superintendent

• Clerk or treasurer not involved in daily entries

• Board members (for high-level review)

What they should review:

• Bank statements and reconciliations

• Check registers and ACH payments

• Budget-to-actual reports

• Journal entry summaries

Key point: The review should be documented (initials, date, meeting minutes).

2. Board-Level Visibility and Oversight

Transparency is a powerful control.

Effective board-level controls include:

• Monthly financial packets

• Check and claims listings

• Budget variance explanations

• Approval of significant journal entries or transfers

Boards don’t need to audit, but they should ask questions.

3. Dual Authorization for Disbursements

When possible:

• Require two signatures on checks over a set threshold

• Use ACH workflows that separate initiation and approval

• Limit who can release payments in the accounting system

Even small changes here can significantly reduce risk.

4. System Access Controls

Accounting software can do more than many small governments realize.

Helpful controls include:

• Restricting vendor setup permissions

• Limiting who can modify payroll rates

• Separating posting and approval rights when possible

• Reviewing user access annually

If one person has full access, document why—and add other layers of review.

5. Monthly Bank Reconciliation Review

This is one of the most important compensating controls.

If the same person:

• Writes checks

• Records transactions

• Performs the reconciliation

Then someone else should:

• Review the reconciliation

• Compare cleared checks to approved claims

• Review unusual reconciling items

This review doesn’t have to be technical, but it must be consistent.

6. Periodic Spot Checks

Unpredictability matters.

Examples:

• Random review of invoices and support

• Spot-check payroll changes

• Review vendor changes for legitimacy

• Compare financial reports to source documents

These don’t need to happen monthly, but documenting them when they do adds strength.

7. Clear Policies and Written Procedures

When staff is limited, documentation becomes even more important.

Helpful policies include:

• Cash handling procedures

• Disbursement approval thresholds

• Payroll change authorization

• Month-end and year-end close processes

Written procedures reduce dependence on institutional knowledge, and protect the government during turnover.

What Auditors Are Really Looking For

Auditors aren’t expecting small governments to function like large ones.

They are asking:

• Do you recognize where the risks are?

• Are there controls in place to address them?

• Are those controls actually happening?

A documented review process often matters more than perfect segregation.

For CPAs: How to Help Small Government Clients

If you work with small governments:

• Help them identify their highest-risk areas

• Recommend controls that fit their size and staffing

• Encourage documentation over complexity

• Frame controls as protection—not criticism

Good compensating controls make audits smoother and clients more confident.

Strong Controls Are About Intentional Design

Compensating controls aren’t a workaround—they’re a strategy.

Even with:

• One bookkeeper

• A small office

• Limited resources

Local governments can build a control environment that is reasonable, transparent, and defensible.

Strong controls don’t require more people.
They require thoughtful design, consistent review, and clear documentation.

And that’s something every small government can achieve.