Question

Petty Cash is easily misappropriated if business processes and internal controls are not established and enforced. Provide and explain a minimum of four controls and/or concepts that will help a company ensure that its petty cash accounts are appropriately used and safeguarded?

Answer 1

Petty Cash

The purpose of a petty cash fund is to provide cash to business units sufficient to cover minor expenditures. The use of petty cash funds should be limited to reimbursement of staff members and visitors for small expenses, generally not to exceed $50, such as taxi fares, postage, office supplies, etc. Wherever possible, local units should use the PCard instead of petty cash.

Risks commonly associated with petty cash

• Petty cash is the most liquid asset of an organization and is easily misappropriated if business processes and controls are not established.

Controls

1. Audit Stakeholder opinions

A good first step is to research the opinions of all those involved in the chain of accounting, distribution and use of petty cash. One reason for this is that it could be seen as their fault when the petty cash account does not tally and held incompetent or dishonest. Auditing these opinions is vital; it ensures that the widest view of the problem is gained and because it makes sure that individuals feel inclusive in the change process of formulating company policy. And it also bring all the stakeholder on common page for policy to be made.

2. Write a company Petty Cash policy

On the basis of the opinions gathered in the audit, senior management should shape an organisations Petty Cash policy. This should be comprehensive, clear and concise. It should allow no room for misinterpretation and should be checked for ‘loopholes’. Some good pointers are:

• When setting out processes, define post-holder responsibility for each step
• Define terms such as:All expenditure must be properly receipted, who is allowed to issue petty cash, and validity of taxi fares, e.g. only if supported by cab company name, phone number and licensed badge number of driver

It is advisable to have the policy wording checked by HR and legal advisors to ensure that it does not conflict with employment or company law.

3. Evaluate and select the solution that best meets the business needs

Implementing a petty cash management software solution is a complimentary step, strongly supporting the introduction of policy:

• Create a list of features and functionality, perhaps group them as ‘essential’ and ‘nice to have’
• Discuss the policy with vendors and evaluate products in relation to your business needs
• Assess pre-sales and find out about post sales support; find out if there is the ability to modify the system if the needs of the business change; find out if there any costs for changes.
• Ensure that vendors help in rollout of system and policy
• Reporting features should be fully customised to allow the extraction of management information in any way that it is required. Which will help to keep check on system.

It is important that a petty cash management system is not a silo operated in isolation from other back office business systems. The best systems are able to fully integrate with existing finance and accounting systems.

4. Implementing the solution and policy

Once the rollout date is set, work with the vendor to ensure that preparations are scheduled and successfully carried out. The best vendors will have experienced implementation teams to support this activity.

• Training by the vendor should be included as a standard part of the implementation process
• Help and support features should be interwoven into the system

There is an element of cultural change, so top-down leadership is required. The Finance Department needs to lead, and it is essential to secure the buy-in of branch office management to ensure a smooth and successful change process.

5. Management information enables better financial efficiency

The reporting capabilities of the best systems allows organisations to obtain a single view of the petty cash account without obscuring individual details. This allows access to management information that enables financial efficiency.

Best practices include:

• Generally petty cash funds for orgs (local units) should be set up in amounts not to exceed $500
• Petty cash funds are not to be used as an operating fund (e.g., petty cash funds should not be used to pay invoices for goods or services, to pay salaries or wages or to make advances or loans)
• One employee should be assigned responsibility as custodian of the fund. The tub financial dean or equivalent must approve custodians
• Custodians should maintain a Petty Cash Log including receipts for each disbursement. All disbursements should state business purpose, reimbursee and date
• Petty Cash Log should be complete - petty cash on-hand plus receipts should always equal the original petty cash fund
• Custodians should replenish the fund when cash balance is low
• Prior to replenishing the fund, the custodian should make sure that cash on-hand plus receipts equals the original balance of the fund.
• A supervisor or manager should approve the replenishment request
• Custodians should close inactive petty cash funds
• Local petty cash custodians are responsible for safeguarding petty cash funds and maintaining receipts and detail records to support all transactions
• Local unit management should perform unannounced petty cash audits
• Petty cash funds should be maintained in a secure, area such as a locked drawer or small safe