5 Ways to Improve Your Internal Controls around Cash Receipts and Disbursements

Segregating duties to prevent fraud and reduce weak controls is not always easy, especially when you have a small accounting department. However, there are some simple internal controls that are often over looked that you can put in place to eliminate some risk.

Two areas that you can look at now to improve are your cash receipts and cash disbursements processes. Here are 5 ways to improve them:

1. Set-up a mail log of all remittance received. The mail log could include items such as the customers’ names, amounts, and invoices being paid. This log should then be used to compare to that day’s deposit slip as well as when reviewing a customer’s account. The important control here is that the mail log is compared to the deposit slip, details in the cash book, or a customer’s individual account by an employee who has no access to cash. For example, a company could have an administrative assistance keep the mail log, the controller could then prepare the deposit slip and apply the payments, and then the owner or another manger could review and compare the mail log to the deposit slip and payments applied in the system.

2. Implement a lock box system. Used correctly, lock boxes may improve cash flows, and may improve controls over cash receipts because personnel involved in the accounting function do not have direct access to cash. If you implement a lock box system, an employee who has no access to cash should review periodically the lock box receipts with the customer’s individual accounts to make sure payments are applied properly. With this control you are eliminating the risk that is associated with having the same individual who handles the cash also apply payments to customer accounts.

3. Avoid placing too much trust and responsibility in any one person. For example, bank statements should be sent to a responsible person other than the person who reconciles the bank accounts. The responsible person should review the bank statements and canceled checks looking for any unusual items. This could be done prior to giving the bank statements over for reconciliation.

4. Adopt an electronic payment system. An electronic payment system can be used for recurring payments such as payroll, utility, health benefits, and tax payments. The advantages of implementing this system include the elimination of manual handling, processing, and storage of paper checks, reduced postage costs, but most importantly the elimination or reduction of the risk of check fraud or lost or stolen checks.

5. Incorporate a stamp imprint. All checks submitted for approval and a signature should be accompanied by the supporting invoices. These invoices should be initialed by the responsible party (person who reviews disbursements) to reflect final approval for payment, and to prevent reuse of the invoices. A stamp imprint that includes: a check number, date paid, account charged, approval of prices, receipt of goods or services, approval of footings and extensions, and final approval for payment by the check signer, could be stamped on each supporting invoice and completed prior to payment. Final approval for payment should be dependent on proper preliminary approvals as indicated.

The above controls are simple, but essential, controls that can be implemented to improve your internal accounting processes. However, do not forget that timely review and documentation are the most important and simple controls and should always be used to help reduce the risk of fraud. This includes preparing and reviewing the bank reconciliations timely, and reviewing the accounts receivable and accounts payable ledgers and agreeing them to the general ledger on a regular basis. Management should also review the internal financial statements on a periodic basis and immediately investigate significant variances from budgets and expected results.

MKS&H has CPAs on staff who are well-versed in how to develop, implement and monitor internal controls. Please do not hesitate to contact us should you need assistance with any of the above policies or the current procedures you have in place for your company.

Article contributed by Megan Baker, CPA, MKS&H Manager

About MKS&H: McLean, Koehler, Sparks & Hammond (MKS&H) is a professional service firm with offices in Hunt Valley and Frederick. MKS&H helps owners and organizational leaders become more successful by advising them regarding their financial, technology and human capital management needs.

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