Avoid a Cash Disbursement Crisis Down the Road by Setting Up a Path to Success

Strong internal controls provide peace of mind to business owners so they can concentrate on maintaining and building their company. However, in order to guard against a variety of problems, it’s always a good idea to establish several types of controls, both preventive and detective. Preventive controls exist to make sure that losses are either greatly reduced or eliminated. Ways to accomplish this include segregation of duties, automation tools, access restrictions, and document requirements. On the other hand, detective controls are a terrific tool for finding incidents of fraud and making sure that the preventative controls that are put into place working the way they should. But how can business leaders create a good foundation that delivers an effective and reliable control process over cash receipts? It’s easier than one may think, as long as several key strategies are put into place.

Segregate Roles and Responsibilities

Establishing and communicating a formal expenditure approval process allows individuals to properly plan expenditures in a way that is both practical and accurate, ensuring they include thresholds based upon the acceptable risk for the company. In this pursuit, it is possible to achieve proper segregation with minimal disruption to the business. This is accomplished by providing clear guidelines to three different individuals with three distinct responsibilities: initiate, process, and authorize cash disbursements.

When an individual initiates the cash disbursement (the “initiator”) it’s important to establish clear policies that require the employee to meet documentation requirements in advance of the disbursement request, including the specific expense account that will be used when the disbursement is recorded in the accounting system. The accuracy of recording all expenses is critical to reviewing accurate budgeted costs as well as tracking amounts approved within the budget. Thorough documentation up front not only results in consistent expense reporting, but also speeds up the approval process to ensure vendors are paid on time and any possible discounts have been utilized.

The individual tasked with processing the cash disbursement (the “processor”) is then able to verify the accuracy of the quantities and pricing on each invoice that’s received in order to generate the payment based upon the information provided by the initiator. Invoices approved for payment should either be marked with the payment approval directly on the original invoice or electronically in the accounting system to prevent duplicate payments. And checks that are generated should be clearly numbered and stored in a manner that can track each check in the sequence- including any voided checks.

The individual who signs the checks (the “authorizer”) is also responsible for matching the support to the payment to ensure it is complete. This is often performed for larger disbursements based upon the dollar threshold and the risk tolerance of the organization. It is also a key step to ensure disbursements are properly authorized prior to payment in accordance with every company’s unique policies. If the check signing process is automated through printing or the use of signature stamps, the review process should take place during routine bank reconciliation reviews. This includes the expenditures for the period.

Automation of the disbursement process is another way to strengthen controls. A positive pay system provides the bank with authorized payments that can be matched against checks presented, ensuring the amounts match. Setting up electronic payments for recurring payments to certain approved vendors also reduces the amount of checks being issued, and with fewer checks being processed, the chances of a problem are also reduced. If payments are being made electronically, most financial institutions provide segregation between the initiator of the wire payment and the approver, through the use of separate logins. Call back features are also available as a confirmation of the wire payment and should be directed to an individual that does not have the ability to initiate the wire.

Place Restrictions Where They Matter Most

There are several restrictions that should apply to the person(s) with access to a company’s accounting system that will be generating payment:

• Only have access to the accounts payable module
• Never have the ability to set up new vendors
• Not have the same authorization responsibilities as the initiator of the payment
• No check signing responsibilities, which should reside solely with the third individual

The authorizer also oversees matching the expenditure approval from the initiator, with the payment processed by the processor. If payment information is manipulated on the actual check, the authorizer should not have access to the accounts payable module, confirming it cannot be modified simultaneously in the accounting system. In addition, the check stock should be stored in a secure location with access limited to the person that generates payments in the accounting system, but does not have check-signing authority.

Track and Evaluate. Then Repeat.

Timely reviews and thorough documentation promote a strong control environment in order to detect errors. Always require employees to submit expense reports in order to track travel and other expenditures. As part of the expenditure approval process, select and question certain payments on a routine basis. This reinforces the importance of getting the right initial support and lets individuals know that someone is paying attention to the process. When reviewing copies of cleared checks, a second set of bank statements should be received directly by owners and those charged with governance. This can also be accomplished through read-only access to online banking.

Also consider rotating employee job assignments as a way to strengthen controls. Having a pool of trained individuals serves as a backup to people with cash disbursement responsibilities, and often illuminates opportunities for improvements in the process.

Though the initial implementation of these processes may be laborious and time intensive, once established, they will become second nature and ultimately, allow business leaders to focus on what matters the most: running their business.

Establishing strong internal controls doesn’t stop there. Learn more about creating a solid foundation for your business by implementing a good control environment over cash receipts.