How to Prevent Internal Fraud: Dividing Staff Responsibilities

Your primary protection against internal fraud in your business is properly dividing staff responsibilities when the flow of business cash is involved. Many business people start their operations by carefully hiring people they think they can trust. Unfortunately, those who have learned the truth are the ones who put too much trust in just one employee.

Basically, you should never have one person handle more than one of the following tasks:

  • Bookeeping: Involves reviewing and entering all transactions into the company’s books. The bookeeper makes sure that transactions are accurate, valid, appropriate, and have the proper authorization. For example, if a transaction requires paying a vendor, the bookeeper makes sure the charges are accurate and that someone with proper authority has approved the payment. The bookeeper can review documentation of cash receipts and the overnight deposits taken to the bank, but he or she shouldn’t be the person who actually makes the deposit. Also, if the bookeeper is responsible for handling payments from external parties, such as customers or vendors, he or she shouldn’t be the one to enter those transactions into the books.


  • Authorization: Involves being the manager or managers delegated to authorize expenditures for their departments. You may decide that transactions over a certain amount must have two or more authorizations before checks can be sent to pay a bill. Authorization levels should be clearly spelled out and followed by all, even the owner or president of the company. As owner, you set the tone for how the rest of the office operates; if you take shortcuts, you set a bad example and undermine the system you put in place.


  • Money-handling: Involves direct contact with incoming cash or revenue, whether check, credit card, or store credit transactions, as well as outgoing cash flow. The person who handles money directly, such as a cashier, shouldn’t be the one who prepares and makes bank deposits. Likewise, the person writing checks to pay company bills shouldn’t be authorized to sign those checks; to be safe, one person should prepare the checks based on authorized documentation, and a second person should sign those checks after reviewing the authorized documentation. When setting up your cash-handling systems, try to think like an embezzler to figure out ways someone could take advantage of a system.


  • Financial report preparation and analysis: Involves the actual preparation of the financial reports and any analysis of those reports. Financial reports should be prepared by someone who’s not involved in the day-to-day entering of transactions in the books.  For most small businesses, the bookkeeper turns over the raw reports from the computerized accounting system to an outside accountant who reviews the materials and prepares the financial reports. In addition, he or she does a financial analysis of the business activity results for the previous accounting period.

If you are just starting up a small business, you may not have enough staff to seseparate all these duties. Until you do have that capability, be sure to stay heavily involved in the inflow and outflow of cash in your business by following these guidelines:

  •  Open your business’ bank statements every month, and keep a close watch on the transactions. Someone else can be given the responsibility to reconcile the statement, but you should still keep an eye on the transactions listed.


  • Periodically look at your business check voucher system to be sure there aren’t missing checks. A bookkeeper who knows you periodically check the books is less likely to find an opportunity for theft or embezzlement. If you find that a check or page of checks is missing, act quickly to find out if the checks were used legitimately. If you can’t find the answer, call your bank and put a stop on the missing check numbers.


  • Periodically observe cash handling by your cashiers and managers to be sure they’re following the rules you’ve established. It’s known as management by walking around — the more often you’re out there, the less likely you are to be a victim of employee theft and fraud.
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