17 Aug Control over Petty Cash
The saying “cash is king” is a great truth in business. The opposite is also true – cash can be an easy starting point for dishonest employees to get their fingers in the so-called till. In practice it is often the case that people, who started stealing relatively small amounts, rapidly expand their dishonest deeds to include substantial theft and fraud, for example from bank accounts.
For trustees and appointed managing agents, there is an obligation to guard over the finances of a sectional title scheme by, among others, ensuring that proper internal controls are in place. Due to the fact that the primary purpose of petty cash is for convenient access to cash for the payment of minor expenses, there is sometimes the misconception that the petty cash is not a key link in accounting. Some of the most important factors for the proper maintenance of petty cash records are as follows:
- Petty cash is often the only place in an entity where payments are made in cash. Due to various reasons, cash can be a carrot dangling in front of the nose of a trustee or manager who wants to act fraudulently.
- The custody of cash remains an obvious risk, especially when there are unnecessarily large amounts of money stored in a petty cash This may even form the spark for an armed robbery.
- The so-called “advance/imprest system” is probably the best way to exercise internal control over cash. In short, it means that the trustees need to use their discretion to determine the amount of cash required (the “float”) for a certain period (e.g. R500 a month). The R500 is usually cash drawn from the bank account and put in safekeeping (typically in a small, lockable safe or cash box) by the relevant custodian. Suppose that the total expenditure for a month amounted to R430, an amount of R430 should then be drawn from the bank account at the end of the month or at the beginning of next month. The money is then added back to the petty cash so that the float will again equal the original R500.
- Evidence or source documents for petty cash disbursements are often inadequate, and it is often very easy to falsify such evidence. As far as possible, original proofs of purchase should be available, not just hand written Take for example the purchase of a bag of fertilizer for a complex. Sometimes, when requesting a proof of payment, a small document is written by hand by the custodian from a “cash sales book” indicating “1 bag of fertilizer @ R210”. It does not take much creativity to change the amount of R210 to R270 and thus steal R60. All source documents should be kept in the petty cash box.
- A good control to put in place is ad hoc counting of petty cash by a person other than the petty cash custodian. Should a trustee/manager want to count the petty cash, the custodian should not know in advance that the count will take place. Should this be the case, any deficits that arose due to theft could be temporarily supplemented by the custodian, so that the petty cash seems to be in balance. Therefore, independent petty cash counts should always take place on a surprise basis.
- The trustee/manager performing the count should know beforehand the amount of the total advance or float (e.g. R500). All proofs of payment should then be inspected (e.g. R300 in total). In this case, the cash on hand should be equal to R200 (R500 float minus R300 expenses). Always count the petty cash in the presence of the custodian, and make a brief summary of the count in writing. The summary should show the total advance (R500) and also the total expense receipts (R300). The difference should be equal to the cash as counted (R200). The custodian must sign the summary, firstly to indicate that he/she agrees with the information contained in the summary, and secondly to acknowledge that he/she again took custody of the cash on hand (R200) after the count. The reason for this is to prevent a situation where the custodian at a later stage denies either agreeing with the information on the summary, or that the trustee/manager handed all the cash (R200) back after the count.
Article by LÉANDI STEENKAMP Senior Lecturer
NANDI LUBBE Lecturer Department of Accounting and Auditing, Central University of Technology, Free State (CUT)