Small municipal finance teams often cannot assign every financial task to a different employee. One person may prepare payments, record transactions, and reconcile accounts. That can make errors or unusual activity harder to detect.
Segregation of duties reduces this risk by splitting key tasks among people. When staffing limits make that impossible, add compensating controls. Then document who performs each review, how often it happens, and what evidence they retain.
Start by mapping the work
List the steps in each financial process. Include cash receipts, accounts payable, payroll, bank reconciliations, and journal entries.
For each step, record who:
- Initiates a transaction.
- Approves it.
- Handles cash, checks, or other assets.
- Records it in the financial system.
- Reconciles the records.
- Reviews the result.
These steps show where one person has too much control. For example, an employee who creates a vendor, enters its invoices, releases payment, and reconciles the bank account can both process and conceal a questionable transaction.
The U.S. Government Accountability Office’s Green Book advises management to separate incompatible duties where practical. When staffing limits prevent separation, management should design alternative controls. Local governments should also check applicable state law, local policies, and audit requirements before changing procedures.
Use compensating controls that can be checked
A compensating control adds oversight where duties overlap. It should focus on the specific risk, not just require someone to “review the books.”
A useful review identifies:
- Who reviews: Assign a manager, department head, authorized official, or other appropriate reviewer.
- What they review: Name the reports, transactions, or records.
- When they review: Set a routine schedule and define which transactions need faster attention.
- What they look for: Identify exceptions, unusual amounts, missing support, or unexplained changes.
- What they record: Keep evidence of the review and any follow-up.
A reviewer should understand the process well enough to question unusual activity. Ask the reviewer to note the date, records checked, questions raised, and how each issue was resolved.
Apply the controls to common finance tasks
Cash receipts
Separate collecting money from recording and reconciling it when possible. If one employee must handle several steps, have another person compare the daily receipt report with the deposit record and bank activity.
Use numbered or system-generated receipts. Require support for voids, refunds, and account adjustments. Review those items regularly. Keep deposits secure and follow the deposit timing required by law and local policy.
The GFOA Revenue Control Policy offers guidance on revenue controls. The Washington State Auditor’s segregation-of-duties guide also provides examples for small governments, including controls for receipts, deposits, and reconciliations.
Purchasing and accounts payable
Match each payment to its supporting records. Confirm that the purchase was approved, the goods or services were received, and the invoice is valid.
Restrict access to vendor records. Require an independent check of new vendors and changes to vendor addresses or bank details. Use a second approval for payments where local policy or risk calls for it. After payment, have someone review the payment register for unfamiliar payees, duplicate amounts, and missing support.
Payroll
Separate time approval from payroll preparation. A supervisor should approve hours and leave. A finance employee can process payroll, while an official who did not prepare it reviews the payroll register before payment.
Check new employees, pay-rate changes, unusual payments, and changes to direct-deposit details. Keep support for adjustments. If one employee must perform several payroll steps, require an independent review of the register and bank debit.
Bank reconciliations and journal entries
Have someone who does not handle daily receipts or payment processing prepare the bank reconciliation when staffing allows. If that is not possible, ask a manager or governing-body designee to review it.
The reviewer should check reconciling items, stale checks, unusual transfers, deposits in transit, and unexplained adjustments. Require support and approval for journal entries. Pay extra attention to entries that affect cash or reclassify revenue and expenses.
Set up a small-office review process
A small office may need a manager, city or county administrator, clerk, or governing-body designee to perform some reviews. Assign the role under local policy, and follow legal and governance requirements. Avoid asking someone to approve transactions they prepared or to perform a review without access to the records needed.
For example, a manager could receive the bank statement directly from the bank, review the monthly reconciliation, and examine the detailed payment register. A governing-body reviewer could review monthly financial reports and follow up on large variances or unfamiliar payees.
For every review, state what the reviewer must do. “Review bank activity” is vague. “Compare the bank statement, reconciliation, and payment register; investigate unresolved items; record the date and outcome” gives the reviewer a clear task.
Limit system access
A paper procedure will not help if the finance system gives users unrestricted access. Set permissions to match job duties. Avoid allowing one user to create a vendor, enter an invoice, approve it, and release payment.
Review access at least annually and whenever staff roles change. Remove access promptly when an employee leaves or no longer needs it. Keep system logs where available, and review high-risk changes such as vendor or employee record updates.
Put the controls in writing and revisit them
Create a simple control matrix. For each process, record the risk, assigned task, reviewer, review frequency, evidence retained, and escalation path. Note any duties that cannot be separated and the compensating control used instead.
Then test whether the control works. Check that reviews happen on time, that exceptions are followed up, and that evidence is retained. Revisit the matrix when staffing, software, bank services, or procedures change.
The GAO Green Book and GFOA’s guidance on internal control and management involvement can help inform a review. Use them alongside requirements that apply to your municipality.
Municipal finance teams can also seek support with accounting and finance operations, audit and internal-control services, and management consulting and procedure development.
Use a practical standard
Small staffing levels do not remove the need for control. They make clear assignment, limited system access, independent oversight, and written evidence more important.
Map the work. Identify the overlaps. Assign a reviewer. Keep proof that the review happened. Then update the process when roles or risks change.
About the Author
Danny Lamonte, MBA, is an accounting, finance, and business consulting professional associated with Municipal Central. His professional focus includes financial management, accountability, and business advisory services.