Why Dual Control is Essential for Small Businesses (Simple controls to avoid fraud and embezzlement)

To put it simply, Dual Control safeguards against any single individual having too much power or control.  In my experience, many internal bookkeepers are given way too much autonomy in small businesses which can lead to fraud and embezzlement.  Unfortunately, it’s frequently long-term employees that commit these crimes, and because the business owners trust them so implicitly, it can go on for years before anyone ever notices.

Why Dual Control is Essential in Business Accounting

1.     Mitigating Human Error

Even the most meticulous and well-meaning individuals can make mistakes. Dual control provides a vital safeguard against unintentional errors in published media and documents as well as accounting transactions.

Control It:

• Require at least two competent people to review all media (website, Instagram, Facebook, client agreements, presentations, etc.) before they are published or presented.

• An internal bookkeeper should never be allowed to reconcile the same bank and/or credit card accounts that they pay from.  This is one of the primary services that we provide. Nothing is fool-proof, but having a second set of eyes on everything promotes accountability.

Accounting Example Case: A designer client hired a new interior design bookkeeper; she told the designer she knew how to use Studio Designer and the designer took her at her word.  When we started reconciling, we found that the bookkeeper had been posting ALL disbursements as overhead type expenses although most should have been applied to purchase orders.  Having a second set of eyes allowed quicker correction of the mistake.

2.     Mitigating Temptation

Our employees are frequently our friends, but even if not, we don’t intentionally hire people we think will steal from us. However, I have seen many times that what started out as an honest mistake became something different.

Example Case: Your employee uses their personal Amazon account to purchase something for your business.  They enter your business card to pay for it and forget to change the default payment card back to their own account.  Or your employee is at the grocery store and accidentally gives the cashier the wrong credit card.  It’s only an accident, but when no one notices, it becomes more frequent.

Control It: 

• Get an Amazon Business Account.  Each employee has their own login, purchases are tied to the employee, and controls can be put in place to require approvals if you like.

• Any employee who needs to make credit card purchases should have their own card.  Sharing one credit card is a really bad idea.  Avoid getting totally separate accounts, this just costs more admin and bookkeeping time. Sub accounts make it easy and holds your employee accountable for anything they charge.

3.     Enhancing Accountability and Transparency

Dual control promotes a culture of responsibility and transparency which leads to immeasurable benefits including:

• Clear Roles and Responsibilities: By clearly defining who initiates transactions and who reviews or approves them, dual control establishes clear lines of accountability for each step of the process.

• Audit Trail: The involvement of multiple individuals in a transaction creates a robust audit trail, simplifying the process of identifying who was responsible for specific actions in case of discrepancies or investigations.

Implementing Dual Control Effectively

To maximize the benefits of dual control, businesses should:

• Identify Key Transactions: Determine which financial transactions require dual control, such as initiating and approving payments, managing user access to financial systems, handling cash, and reconciling accounts.

• Define Roles and Permissions: Clearly assign roles (e.g., initiator, approver) and customize approval permissions based on the nature and value of the transaction.

• Utilize Technology: Leverage digital banking platforms and accounting software that offer built-in dual control features and customizable workflows for seamless implementation.

• Train Employees: Educate employees about the importance of dual control procedures and their responsibilities within the process.

• Be Involved: If employees know that you are reviewing financials and reports monthly, they are more likely to stay on top of their own tasks and perform at higher levels.

Conclusion

In an increasingly digitized and fraud-prone landscape, dual control serves as a crucial safeguard for business accounting. By implementing this practice, businesses can significantly reduce their vulnerability to fraud and errors, strengthen internal controls, and foster a culture of accountability and security. Dual control is not merely a compliance measure; it is a fundamental pillar of sound financial management and a strategic investment in the long-term security and success of the business.