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Module 23 Cash Management

and Internal Controls

Learning Objectives: ■■ Understand cash management policy ■■ Review types of cash ■■ Review examples of fraud

The purpose of this module on cash management is to help the student learn how to protect government agencies against theft, corruption, and poor cash management strategies. Every government must adopt a cash management policy. Often, the state will dictate at least some parts of a locality’s cash management policies.

Cash Management Policy

Every governmental unit should have an internal controls officer, whose job it is to create an internal control structure that addresses all aspects of financial reporting, including how much cash is flowing into and out of the agency. The officer will draft guidelines that governmental employees will follow to protect the agency and its employees from theft, corruption, and genu- ine mistakes that result in a loss of funds. The internal controls officer should have no conflict of interest with regard to any banking institution with which the government has transactions. Most state and local governments turn to the Government Accounting Standards Board (GASB) for guidance about internal controls. Any guidelines created will include the following:

■■ Separation of duties

■■ Custodial safekeeping of funds and certificates

■■ Clear delegation of authority

■■ Written confirmations of all transactions, including electronic ones

Government agencies used to use lockboxes and other types of storage to securely keep mon- ies collected from various activities such as parking meters or events. Now most of this activity is

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electronic, so a cash management policy must include electronic guidelines to protect the agency against theft and fraud.

Types of Cash

Cash usually refers to currency and other items such as checks, money order, debit cards, and bank drafts. Controlling cash is extremely important since it is the most liquid asset and thus it is often dif ficult to prove who has ownership of cash once it has changed hands.

Cash Receipts Anytime an organization receives cash, it should prepare a receipt and keep a copy. Also, cash

should be counted and deposited promptly and regularly. It is absolutely necessary to minimize the amount of cash on hand in any organization.

Cash Payments To control cash, an organization should make all disbursements using checks and debit or

credit cards, thereby providing a record of cash payments. If an organization uses electronic debit cards, it should carefully keep track of them. If the organization uses checks, they should be prenumbered, and unused checks should be kept under lock and key.

If only one person is authorized to approve, sign, and record the checks, then the organization is leaving itself open to theft. These duties must be separated, with one person approving expen- ditures, another signing the checks, and still another recording the transactions. In the account- ing world, this is called separation of duties. The organization should also employ supporting documentation, and each check should be required to have an authorized approval signature.

Checking Accounts A signature card should be on hand at the bank, and it should show the bank account number

and the signatures of the people authorized to sign checks on the account. There should also be a deposit ticket containing the account number and the amount and number of checks written on the account. Copies of the deposit ticket should be kept.

Bank statements are sent electronically or in hard copy form, usually every month. The state- ments report the balance of the account at the beginning of the period, additions and subtrac- tions during the period, and a running balance. It is important to immediately reconcile the bank statement to the organization’s records. If this is done monthly, then the potential for fraud and abuse is far less.

Petty Cash Funds Often, government agencies use small amounts of money to pay for postage, delivery charges,

taxi fares, etc. This should be minimized. Postage can be ordered online, where such expendi- tures are easy to track. An account can also be set up with a local taxi company. It is much easier to keep track of taxi records than it is to track someone who is paying cash. Also, the organiza- tion’s employees should be issued credit or debit cards, which are easier to track than cash.

Credit and Debit Cards The internal controls officer must issue any credit and debit cards along with guidelines for

their use. Track the use of credit and debit cards closely. If an employee is buying cigarettes with the organization’s debit card, then that employee needs guidance quickly.

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Electronic Transactions The Internet makes it is easier than ever to steal cash. The don’ts are clear: Limit the number

of employees who have electronic access to bank accounts, hire people only after a detailed back- ground check, change duties among finance people often enough that no employee can dominate one area of finance, require staff to change their passwords to financial records frequently, do not keep the same passwords for years, and, most importantly, make sure all your financial staff are bonded. A fidelity bond provides insurance that protects an organization from losses caused by a staff member’s dishonesty.

Controlling Personnel and Nonpersonnel Services

Requiring Vacations Often, an organization finds fraud when the guilty party takes a vacation. In that instance,

someone else does the vacationing employee’s duties and discovers anomalies in the financial data. Fraud is often committed by those we least expect, so please require all employees to take vacations.

Controlling Travel and Cell Phone Use Often, state and local governments use central car agencies to control and monitor the use of

government cars. If employees are permitted to use their own cars in their work and then are reimbursed for gasoline, the agency must carefully monitor the use of those personal cars. It is the same with cell phones. These privileges can be easily abused, at considerable cost to the agency.

Monitoring Vendors One of the easiest ways to steal from an agency is to set up a dummy vendor. When a delivery

comes, a dishonest employee could change the agency’s address and deliver the government supplies to a dif ferent address. Unless vendor purchases are being monitored, a government employee could get away with this type of fraud for years. Someone other than the person who orders supplies should review deliveries and approve invoices that are sent to the accounting office for payment. This is called separation of duties.

Preventing Bribery It is dif ficult to stop contractors from bribing government employees. Examples of contrac-

tors who have an incentive to commit bribery include real estate developers who want to buy land owned by the government or obtain building permits. Government land sales and permit- ting processes are slow, detailed activities, and interested parties may pay monies to government employees to facilitate the transactions. It is dif ficult to monitor an illegal activity in which only two people are involved, but luckily, most bribery involves more than two people and eventually someone is caught.

Examples of Fraud

Recently, the Washington Post ran an article about a government employee who had been sen- tenced to 2 years in prison for fraud. She had funneled millions of dollars in contracting work to her husband’s company (Zapotosky, 2013).

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The New York Times reported that an official in New York City’s Department of Housing Preservation and Development, in charge of approving applications from developers who wanted to build affordable housing in partnership with the city, had accepted bribes from developers. In 2012, the official pleaded guilty to accepting $2.5 million in bribes (Secret, 2014).

Professors at the University of Illinois at Chicago studied corruption in Illinois and found that 31 of the 100 Chicago aldermen who had served since 1973—and 4 of the 7 governors—had been convicted of corruption. Much of this corruption took the form of bribery (Simpson et al., 2012).

A government employee had stolen students’ financial aid checks, forged their endorsement, and deposited them into her personal bank account. A subsequent investigation revealed that she had stolen approximately 100 federal financial aid refund checks over a couple of years. Surveillance of an ATM machine showed her depositing some of the checks into her personal accounts (Bloom, 2013).

Summary

Every government agency must have a cash management policy in place. In addition, all employ- ees must receive training in ways to handle cash. This module has explained dif ferent types of fraud, some of which is very dif ficult to detect. The job of an internal controls officer is to ensure that cash is managed in such a way that these types of corruption happen rarely.

Discussion Questions

1. What is meant by separation of duties?

2. Why is cash more susceptible to theft?

3. Why should a customer always be given a receipt?

4. Why should an organization have a petty cash fund?

5. Why should every employee be required to take a vacation?

Assignments

1. In a California town, the mayor put a hold on all credit cards used by employees after the local newspaper revealed that hundreds of thousands of dollars had been charged to the cards for dinners, theater tickets, out-of-state trips, and sporting events over a 3-year period. One man- ager even used the town’s credit card to travel to see his favorite football team play in Minnesota. How could the town better protect itself from this type of credit card abuse?

2. In Atlanta, a nonprofit discovered that its director of facilities had embezzled more than $1.1 million. The FBI stated that an employee had submitted invoices for bogus expenses and then deposited the reimbursement checks into his own accounts. How could the nonprofit have protected itself from this type of embezzlement?

References

Bloom, A. (2013, March 23). Financial aid adviser charged with theft from Brockton trade school students. The Enterprise. Retrieved from http://www.enterprisenews.com/x1893343419/ Financial-aid-adviser-charged-with-theft-from-Brockton-trade-school-students.

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Secret, M. (2014, March 17). Ex-official tells of cash and refrigerators as bribes. The New York Times. Retrieved from http://www.nytimes.com/2014/03/18/nyregion/ex-of ficial-tells-of- cash-and-stoves-as-bribes.html.

Simpson, D., Nowlan, J., Gradel, T. J., Mouritsen Zmuda, M., Sterrett, D., & Cantor, D. (2012). Chicago and Illinois, leading the pack in corruption (Anti-Corruption Report Number 5). Chicago: University of Illinois at Chicago. Retrieved from http://www.uic.edu/depts/pols/ ChicagoPolitics/leadingthepack.pdf.

Zapotosky, M. (2013, December 6). Former State Department worker, husband sentenced for contracting fraud. The Washington Post. Retrieved from http://www.washingtonpost.com/ local/crime/former-state-depar tment-employee-husband-to-be-sentenced-for-contracting- fraud/2013/12/05/d85ecbda-5c3b-11e3-bc56-c6ca94801fac_story.html.

Additional Readings

Government Accounting Standards Board. http://www.gasb.org/.

Weikart, L. A., Chen, G. G., & Sermier, E. (2013). Budgeting and financial management for nonprofit organizations: Using money to drive mission success. Thousand Oaks, CA: CQ Press.

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