What it means
The core idea is that any process with a single unsupervised owner will eventually go wrong, whether through carelessness, pressure or dishonesty. Checks and balances break that process into steps owned by different people, so that a mistake or a manipulation has to survive more than one pair of eyes.
In a finance function this usually starts with segregation of duties. The person who raises a purchase order should not be the person who approves the invoice, and neither should be the person who releases the payment from the bank.
Approval thresholds add a second layer by escalating decisions as the money at stake rises. A team leader might sign off spending up to $5,000, a director up to $50,000, and anything larger goes to the executive committee or the board.
The balancing half of the phrase matters as much as the checking half. Controls should restrain risk without stopping the business from moving, so a company that requires four signatures on a $200 stationery order has created friction rather than governance.
Good design puts the heaviest scrutiny where the exposure is greatest and leaves routine work to flow. Beyond day to day operations, checks and balances describe the wider governance structure: an independent board that can question the chief executive, an audit committee that can talk to auditors without management present, and internal audit reporting to the board rather than to finance.
These arrangements exist so that bad news can travel upward even when someone senior would rather it did not. A control only counts if it leaves evidence behind.
Approvals recorded in an email chain, bank reconciliations signed and dated, and access logs showing who changed a supplier record are what allow an auditor or a board to confirm that the design on paper matches what happened in practice.
In practice
Real-world examples.
Example
A software company requires that any new supplier be set up by the accounts team and approved by a second person in finance before a payment can be scheduled. When an email arrives asking to change a supplier's bank details, the two person rule catches the fraud attempt because the requester cannot approve their own change.
Example
A family owned manufacturer appoints two independent directors to its board after a bank asks about governance. The independents chair the audit committee and meet the external auditors alone once a year, giving the auditors a route to raise concerns without the founder in the room.
Example
A charity separates the roles of grant assessor and grant approver, and rotates assessors between regions annually. The arrangement reduces the risk of a long standing relationship quietly shaping which applicants receive funding. Trustees also review a sample of approved grants each quarter and record the outcome in the minutes, so the check is evidenced rather than assumed.
Case study
Seen in the real world.
The following account is fictional and offered purely as an illustration. Kettleford Signs, an invented commercial signage business with 60 staff, let its office manager handle supplier setup, invoice approval and bank payments because she had been there for a decade and was completely trusted. Over three years she created a supplier that existed only on paper and paid it roughly $14,000 a month, which the owner never questioned because the invoices looked ordinary and were always approved.
The scheme surfaced only when she took an unplanned month of leave and a colleague covering the payment run could not find any delivery notes for that supplier. The illustrative loss came to around $500,000, most of it unrecoverable. Afterwards the company split supplier setup, approval and payment release across three people, introduced mandatory two week continuous leave for anyone handling payments, and asked its accountant to review new suppliers each quarter.
Watch out
Common mistakes.
- Believing that trust removes the need for controls. Checks and balances protect honest employees from suspicion as much as they deter dishonest ones, which is why good staff usually welcome them.
- Writing controls into a policy document and never testing whether they actually happen. A dual approval rule that everyone bypasses when the finance director is travelling is not a control, it is a paragraph.
- Adding approvals until the business seizes up. Layering sign offs on low value transactions creates delay and encourages workarounds, which weakens the controls that genuinely matter.
Questions
People also ask.
Are checks and balances only relevant to large companies?
No, small businesses are often more exposed, because one person frequently handles ordering, banking and bookkeeping with nobody reviewing the work.
What is the difference between checks and balances and internal controls?
Internal controls are the specific procedures such as reconciliations and approval limits, while checks and balances describes the wider principle of distributing power so no one person can act unchecked.
How do you know if the balance is right?
Compare the cost and delay of a control against the size of the loss it prevents, and concentrate the strongest controls on cash movement, payroll changes and supplier bank details.
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