We all hope our co-workers and employees are honest, and they probably are. Yet, improper cash control, poor cash practices, and weak cash security can tempt people who are basically honest. Think about parking at the local mall. You always roll up your windows and lock your car to protect your possessions, especially if you made some purchases at an earlier stop. Most of the people who walk by your car at the mall are honest, yet you don’t want to tempt them by making it easy to take something that doesn’t belong to them. What are some internal controls for cash?
The same idea applies to your cash process; you want to use best cash practices and follow proper cash procedures. In business you can reduce cash risk with good internal controls for cash through removing opportunity and temptation. While your employees may be honest, sloppy cash security is like leaving your car windows down at the mall — you are just begging for something bad to happen.
Proper precautions for internal controls for cash involve several basic tenets, but the most important is clear and accurate recording of all cash that is received and of all cash disbursements. Make sure all cash transactions are documented and recorded immediately. A delay in recording cash transactions not only introduces an opportunity for errors, but also creates the opportunity for temptation that could lead to cash fraud. The recording element of the cash security doesn’t have to be difficult or complex. In fact, simple basic cash records can improve the likelihood they will be done immediately and with less error, and thus reduce risks to cash.
With the proper records created during all cash transactions, then regular reconciliation can take place. Depending on your organization, there may be reconciliations that need to occur at several levels. These can include cash drawer reconciliations at the end of a shift or the business day, reconciliation prior to a bank deposit, and regular bank statement reconciliations. Management or owner involvement in reconciliation and regular internal audits sends a signal to all members of the organization who handle cash that internal cash control and cash security is a priority.
Proper separation of duties is also an important tool that discourages unethical cash practices and increases cash security. The idea behind separation of duties is that it is much less likely for two employees to collude to commit fraud than it is for one employee to act alone. This obviously applies to the reconciliation duties discussed above. The person who does the daily cash deposit reconciliation should not be the one conducting the monthly bank statement reconciliation.
Frequently, cash procedures call for two people being present any time a large amount of cash is being handled or transported. This helps prevent internal fraud as well as discourages threats of external theft or robbery. A restriction on the number of people who have access to cash is also an important method to prevent cash fraud and abuse. It creates a high level of accountability, which in turn reduces temptation and your cash risks. If 20 people work in a business, but only three have access to the cash drawer or petty cash, then theoretically you have reduced the risk of abuse by 85%.
Physical control over cash means how the cash is literally stored and handled. The obvious rule of thumb is that the less cash on the premises then the less chance for theft or embezzlement. Make bank deposits as often as necessary and you can even engage an armored car service that will regularly transport your cash safely. Keep the cash you have on hand in a safe if possible; or at least securely locked. Without good physical control it is difficult to restrict access as mentioned above.
Along with good physical control of cash, it is a good cash practice to keep cash records in a separate location from the cash itself. That way if fraud or theft does occur, they cannot easily take, destroy or modify the cash records. Separation of cash records and cash is a simple cash security practice that can discourage theft, or at least allow the theft to be discovered and clearly documented.
Proper cash controls can be documented in cash procedures as part of your cash management process. Be sure to understand the cash process and document it clearly in an accounting procedure. Keeping your cash procedures correct and up to date also sends an important message to your staff about the due diligence of owners and managers. If the cash process changes then changing the documented cash procedures should be a high priority.
These practices are vital for internal controls for cash, and the goal should be to prevent fraud and theft before it happens. The proper control involves all the elements we have discussed; proper cash records, separating duties, regular oversight and audits, physical handling, and understanding the cash management process including correct cash procedures. Proper control reduces temptation and opportunity — the keys to prevention.
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