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 astrategy.
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.
