In allowing employees to work from home an area that should be a concern to all employers is ensuring that you have implemented and communicated proper internal controls, especially around any transaction related to the receiving or payment of cash.
Internal controls are defined a set of processes that are used to ensure the following:
An organization's objective in completing operational effectiveness and efficiency,
An organizations ability to properly prepare reliable financial reporting, and
The need for an organization to maintain compliance around laws, regulations, and policies.
When implementing internal controls, specifically around any transaction that relate to the movement of cash, the controls should be defined utilizing one or more of the following five characteristics, which should ensure that the control is going to be efficient and effective. With the Corona Virus Pandemic forcing our accounting departments to Work From Home, “WFH”, it is hard to enforce such controls when you do not work within the same office environment. Provided under each of these characteristics is some examples of control objectives that should be focused on especially during a WFH environment in order to facilitate the design of the internal control: In today's blog we will look at the first three Characteristics of controlling cash:
Segregation of Duties
Safeguarding Assets: Establishing policies and procedures that will provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of cash or cash equivalents.
All invoices or requests for disbursements should be supported by appropriate receipts or documentation that indicates the proper receipts of goods and/or services.
WFH – it is difficult to constantly be transporting paperwork between authorized singers and the accounting department. Therefore the company should adopt a paperless office environment where the invoice and supporting documents can be stored electronically in a document management system, which will not only provide easy access to the invoices and supporting documentation, but will also allow comments and approvals to be added to the invoices. A properly implemented document management system will also provide a proper audit trail for tracking when documents were sent, opened and approved.
All disbursements should be made using pre-number checks, that are in a proper sequence, and are maintained in a locked cabinet drawer only accessible to authorized individuals.
WHF - Employers may not want pre-printed check stock to be stored at employees homes and therefore the best way to implement this type of control is to ensure that your accounting system will control the entire printout of the check, including the check numbers and mica coding on the bottom of the checks. Therefore only blank check stock needs to be maintained at an employees home and the accounting software will handle the printing of the entire check.
No check disbursement should be made payable to cash and no blank signed checks should be given out to be used for a future purchase.
WFH – this is most important control when working from home. Never have checks prepared to cash, always require that a vendor is created and used. Additionally, never sign a blank check. Blank checks lead to checks never being posted or worse can lead to potentially fraudulent activity by employees.
Larger checks should require a higher level of authority and should be based on a pre-determined value, should require more than one signature.
WFH - By requiring two signatures, the Company is verifying that both signers agree the payment is proper and reasonable. This is an especially important control when a signatory is working from home and maybe signing all the checks by themselves. The requirement of two signatures reduces the likelihood that one will write improper checks to himself or herself or to a fictitious vendor.
A cash disbursement voucher should be prepared for each invoice or check request that details the date of check, check number, payee, amount of check, description of expense account to be charged, authorization signature, and accompanying receipts.
WFH- As was identified above with the need for supporting documentation to be sent along with all checks, the cash disbursement voucher can be easily handled by using a document management system, which can control the distribution and approval of a check request.
Segregation of Duties: Ensuring policies and procedures are provided to ensure that different personnel handle different parts of transactions related to the maintenance of cash transactions. Proper segregation of duties will ensure that not one person has complete control over the cash transaction cycle especially when you are physically separated in a Work From Home, WFH, environment.
· Control Objectives
The authorization, processing, check signing, recording, and bank reconciliation functions should be clearly segregated.
WFH - this separation of duties is of utmost importance when you are in a WFH environment. The best way to accomplish this in a WFH environment is making sure that the accounting software you use is easily accessible, but secure, over the internet. Most cloud-based accounting systems are ideal for this type of work and separation of duties.
Any changes to customer or vendor payment information should be approved in advanced by someone other than those responsible for recording cash payments.
WFH– this type of control will ensure that the no payments are being made to fictitious vendors.
The cash disbursement journal posting should be under the control of someone independent of the authorization, check processing, and check signing process.
WFH – by separating these actions in a WFH environment will ensure that all checks that are being created for signature are being reviewed prior to them being posted to the general ledger
Advance payments to vendors and/or employees should be recorded as receivables and controlled in a manner which assures that they will be offset against invoices or expense vouchers.
WFH – this is important for both working from home and in the office, by posting advance payments as a receivable they become traceable and avoid duplicate payments being made when goods are finally delivered.
There should be similar controls developed around all non-check disbursements such as wire transfers, ACH transactions, banking transactions and debit memos.
WFH – This is also important for both working from home and in the office. When WFH it is easier to change your processes away from check writing and more into wire transfer and ACH payments. Without proper controls over this process the company will be vulnerable to theft and fictitious payments being made.
Accountability: Ensure all cash transactions have been authorized, have been properly accounted for, and have been documented properly. Ensuring accountability among employees also helps to reduce the risk of lost or stolen cash receipts, improperly disbursed cash payment, or incorrect recording of cash transactions. Identifying and establishing accountability in a Work From Home, WFH, environment is of utmost importance to reduce confusion and potential theft of assets.
· Control Objectives
Persons authorized to approve expenditures should be clearly identified and those individuals who are responsible for cash transactions should be aware of who are these authorized parties.
WFH – communications in a WFH environment is of the utmost importance when trying to establish accountability, controls and reduce theft.
All new vendors/contractors should be approved in advance in writing.
WFH – The accounting team are served best if the approval process starts with those accountable for binding the company to an obligation or expense. If proper controls are in place, including instituting a paperless office with document management, all payments will be approved in advanced by the appropriate parties and this approval will be visible to all who require it.
All invoices from unfamiliar or unusual vendors should be reviewed and approved for payment by authorized personnel who are independent of the invoice processing function.
WFH – as was stated above these approval processes only serves to eliminate bottlenecks in workflow and will expedite the payment process and ensure only authorized expenditures are made by accounting.
Only check signers should be held accountable for transferring or authenticating non check payments.
WFH – This point dovetails the need to proper payment processes and segregation of duties around non check payments. As the ease of using online banking will continue during the work from home environment.
Your organization should have an up-to-date accounting policies and procedures manual and if so, are they distributed or made accessible to all personnel.
WFH – These policies should be updated for processes and procedures that will need to be enacted when this is a work from home environment.
All current job descriptions should be on file for each employee in the organization.
Please check back next week for part 2 in this series where we will talk about: