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Cash Accounts

March 20th. 2015

For small businesses, creating a proper internal control environment can be difficult.  At times it may seem like there are not enough staff available to have a proper segregation of duties for controls to be effective.  The absence of this control environment however can expose your business to employee fraud.  While we would like to believe we have hired and employ upstanding individuals, it is sometimes those that we put the most trust that are found to be taking advantage of the situation.


It is important to have proper controls over your cash accounts to ensure that your funds are protected. Here are some simple yet important controls that can be implemented to help protect yourself from employee fraud:


Dual signatures:  Requiring each cheque to be signed by two individuals ensures that all cheques written are independently reviewed.  This is especially important where an employee with access to cheques is also able to sign cheques.  Without this control in place it could be possible for the employee to write a cheque to themselves or someone close to them, sign the cheque, and cash it without the knowledge of management.


Small business solution: Only the owner-manager should be able to sign a cheque with one signature.  All other cheques should be signed by at least 2 employees.  Cheques should never be signed in advance.


Bank reconciliations: Bank reconciliations are an important business function.  Not only do they ensure all accounting transactions have been recorded but it is also helps ensure there is no cash leakage.  It is important to consider who is preparing the bank reconciliation however.  In an ideal control environment, the staff member who prepares the bank reconciliation should not have cheque signing authority.  This results in an added level of scrutiny over all cheques written.  It also helps to ensure that a fraudulently prepared cheque is not written off as a miscellaneous expense by the signatory during the cheque reconciliation process.  A best practice is to reconcile the bank weekly or semi-monthly.


Small business solution:  If the bank reconciliation is prepared by an employee with cheque signing authority, the owner manager should review the bank reconciliation and all adjusting entries related to the reconciliation in detail.  Additionally, all adjusting entries should be supported by source documents.  Consideration should also be given to having the owner manager open the mailed bank statement each month and review it in detail before the bank reconciliation is prepared.  Part of that review should also include a review of the payee and the signatures on all of the cheques.


Marking paid invoices:  All invoices should be marked as paid once a cheque has been prepared.  This not only ensures that vendors are paid only once but also that an employee does not try to use the same invoice at a later date as support for a fraudulently prepared cheque.  Without this step it could be possible to create a cheque for an identical amount after a vendor is paid, but to a payee with a similar name, or in some cases, a completely different name.  In such a situation, the fraudulently prepared cheque would later be cashed in an account opened by the employee trying to commit the fraud.


Small business solution:  A stamp is a quick and easy solution to marking invoices.  Paid invoices should also be filed separately from unpaid invoices to ensure that they are not submitted for payment again at a later date.  A list of disbursements by vendor should also be reviewed on a regular basis, taking note of vendors which seem to have abnormally high amounts disbursed to them.


Fraud at times can be difficult to uncover.  Often these schemes are given careful thought to ensure that they are not caught.  Over time, the risk that the fraud is uncovered increases, but not before the company may have experienced significant loss.  The control environment and procedures should be reviewed periodically to ensure that your hard earned funds are adequately protected from employee theft.




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