By Gary Lasker
To properly respond to fraud, business owners need to understand why certain individuals commit fraud. The fraud triangle has become the model for providing an understanding of fraud. The basis of the fraud triangle is that every fraud has the following three elements in common: 1.) pressure (generally financial), 2.) opportunity to pilfer cash and other assets (ability to commit the fraudulent act), and 3.) rationalization of the fraudulent act (the reason for justifying the fraud).
One of the major accounting cycles in every establishment is sales and cash receipts. In fact, every business establishment makes deposits. Cash receipts, cash disbursements, and payroll are common areas of employee embezzlement as these areas are where the cash flows. Certain cash controls should be in place regardless of the size of the business. Accordingly, in this article, we will briefly discuss important internal controls to prevent the stealing of cash and other remittances received by a business.
The basic premise of internal control is that no single employee should handle all phases of a transaction and maintain all the related accounting records. Thus, separation of duties is the key element to having good cash receipt controls as it helps to prevent an employee from committing and concealing a fraud. Employers normally cannot control employee financial pressure, motivation, or even influence an individual’s own code of ethics. But, employers can control the opportunity to steal element of the fraud triangle. The best way to limit opportunity is to have good internal controls. Separation of duties reduces the opportunity for embezzlement to near zero. Lax internal controls provide a temptation to steal for employees at all levels of an organization, especially for those with financial problems.
Separation of cash receipt duties involves having a person, and preferably two people, being present to open the mail and to initially record all cash and checks received in either a computerized or manual cash receipts log. The cash receipts log should preferably be in a prescribed form and normally includes the date received, customer’s name, type of payment (cash, check, or wire), and a description of what the payment was for. All checks should be immediately restrictively endorsed “for deposit only” with a hand stamp that includes the name and bank account number of the business. Next, another employee should prepare the deposit slip from the log. Subsequently, yet a different individual should post the accounts receivable payments to the customer accounts. A different employee altogether should make the daily bank deposit. A person independent of the cash receipts and account receivable functions should compare the details in the cash receipts log to the bank deposit slips and then to the bank statement.
Ideally, duties of the initial recording of cash receipts, the bank deposit, bank reconciliation, posting of cash receipt payments, and reconciliation of the accounts receivable subsidiary ledger with the general ledger balance should be segregated to help prevent cash theft. In very small organizations, where segregation of duties can be a challenge, focus on segregating the duties of handling the cash receipts from the revenue and accounts receivable recording functions.
In addition to separation of duties, there are other important controls to implement to decrease the risk of fraud during the cash receipt process. Some of these controls include: 1.) signing of the cash receipt log to establish a permanent record of the initial cash receipt intake, 2.) making daily deposits as this makes it easier to trace and reconcile daily postings to the bank deposits, 3.) keeping undeposited funds in a safe, 4.) considering the use of a lockbox whereby payments are remitted to a post office box and the bank collects and processes the remittances especially for entities with a large volume of cash receipts, 5.) using multi-part bank deposit slips, 6.) bonding of employees who handle cash receipts, 7.) monitoring the work of employees involved in the cash receipting system, and 8.) considering having your customers transfer funds electronically.
Good controls are the most important means of limiting opportunities to steal funds. The above controls normally reduce the risk of cash receipt theft to a very low likelihood. Of course, every business must evaluate each control on a cost-benefit basis to decide which controls to implement.