Which of the following is an effective internal control over cash disbursements?

Strong internal controls are necessary to prevent mishandling of funds and safeguard assets. They protect both the University and the employees handling the cash.

Safeguarding Cash

• Restrictively endorse checks immediately upon receipt stating “For Deposit Only – Syracuse University”
• Keep cash/checks in a locked and secure area until they can be deposited. Access to the area should be restricted to only designated individuals. If a person with custody responsibilities leaves their position, any keys should be collected or combinations changed. Remember that while cash or checks are in your custody you are responsible for it.
• Make timely deposits. The sooner cash/checks can be deposited, the less exposure to theft or loss of funds. Ideally deposits should be made within 24 hours. If amounts are insignificant (less than $100), then deposits can be made weekly.

Recording Cash Receipts

• All cash receipts should be recorded immediately by use of a cash register, data entry into a computing system, pre-numbered receipt book, or handwritten log. Receipts can be in manual or electronic format and should contain the amount received, the name of the payer, purpose of the payment, and its form (cash/ check/credit card).
• Provide a receipt. Ideally receipts should be pre-numbered and two-part. One copy should be provided to the payer while the other copy is kept on file. Total deposits can be verified independently by another person by accounting for each sequentially numbered receipt.
• Cash receipts should not be used for petty cash disbursements, check cashing, making change, or for any personal reasons.

Reconciliation

• Verify the deposit by agreeing Cash Operations deposit slip to the general ledger on a monthly basis
• Cash registers and credit card machines should be balanced daily. Over/short amounts should be monitored.
• A dated and signed record of the reconciliation should be maintained

Segregation of Duties

No one person should be allowed to collect, handle or transport and deposit checks/currency without some additional control feature to ensure that all funds are accounted for. Examples of such controls are as follows:

• The person collecting and recording the receipt should not be the same as that making the deposit. Additionally, a person independent of recorder and depositor responsibilities should reconcile the deposit to the general ledger. If there are only one or two people in the department, a review by management of the reconciliation can provide a compensating control.
• When cash or checks are received regularly in the mail, if feasible, two persons should be present when the mail is opened. One person should total and record the remittances (log). The other should prepare the deposit slip and forward it with the cash/checks to Cash Operations. The deposit slips should be reconciled by a third person to the general ledger.
• Keep transfers of cash from person to person to a minimum. Accountability is lost when several people handle cash before it is deposited. If transfers must take place be sure to document it. If you are the transferor you should get a receipt, if you are the transferee you should verify what you are receiving before you provide a receipt. Use of a drop-off/pick-up log can be beneficial when transporting deposits.

Gifts/Personal Checks

• If external gifts directed to the University are received, they should be forwarded to Advancement and External Affairs immediately for processing.
• Personal checks should not be cashed.

Related SU policy: Gift Acceptance Policy

Fees and other Revenues

Use an accounts receivable account to process billing and collection for routine revenue activities. If you are unsure if a cash receipt should be recorded as revenue or an offset to an expense, contact General Accounting in the Comptroller’s Office for assistance. Internal controls surrounding this type of activity include:

The objectives of internal controls for cash disbursements are to ensure that cash is disbursed only upon proper authorization of management, for valid business purposes, and that all disbursements are properly recorded. Grantees will find this resource useful when maintaining internal control for cash disbursements.

While it is impossible to guarantee that these objectives will be met at all times for all transactions, the following practices provide reasonable assurance that they will usually be accomplished. 

Segregation of Duties 

Segregation of duties means that no financial transaction is handled by only one person from beginning to end. For cash disbursements, this might mean that different people authorize payments, sign checks, record payments in the books, and reconcile the bank statements. If your organization is a small nonprofit, managed by volunteers and possibly one staff person, this principle can be hard to put into practice. You might consider having one person, such as the paid staff member, sign checks and assign a different person, such as the board treasurer, to review disbursements, bank statements, and canceled checks on a monthly basis.

Authorization and Processing of Disbursements 

You will want to develop policies regarding who in your organization can authorize payments. Some organizations designate this function solely to the executive director to ensure that a single person is paying attention to monies going out of the organization. In other cases, a department head might authorize purchases for that department, as long as they are within the department's budget. In most organizations, once the board approves the budget, it does not need to authorize individual purchases within that budget. However, unbudgeted purchases would require additional approval. Also, in very small organizations, the board treasurer or board president may be asked to authorize all purchases. Even larger organizations have policies requiring the board to authorize significant expenditures, such as purchases for computers or other assets. It is important to agree and formally define what constitutes a significant expenditure and how these purchases will be handled.

All disbursements should be accompanied by adequate documentation, in the form of receipts or an invoice. Cash withdrawals should never be made via automatic teller machine (ATM) cards. 

Managing Restricted Funds 

Restricted contributions are a form of revenue unique to the nonprofit sector. Money which has been restricted by the donor for a specific use (such as buying a new building, starting a new program, building an endowment, etc.) should only be used for the purpose for which it has been given. However, most nonprofits find themselves tempted to borrow against restricted monies when facing a cash shortage. In cases where the funder clearly prohibits such borrowing, such action clearly violates the funder's trust and instructions and may lead to revocation of the grant. In other cases, donors allow temporary borrowing as long as the money is replaced within a certain period of time, usually within the grant year.

Ultimately, it is the role of the board to ensure that the organization fulfills its obligations to donors. Therefore, in cases where borrowing against restricted funds is permitted, the board should establish policies which describe the circumstances under which such borrowing is allowed. These policies might include how often borrowing may occur, who may authorize the interfund loan, and how much can be borrowed (such as a percentage of the total grant). In addition, a repayment plan should be established and the board should be advised regularly on the status of any interfund loans. 

Check Signing 

There is some debate regarding the number of signatures required on a check. In many cases, it is useful to require two signatures on checks, especially for purchases over a certain amount. This amount will vary with the organization's budget; your accountant may be able to help you determine how much is significant. Even though checks require two signatures, three or four people might have check signing authority to ensure that two signers are available to make disbursements. The number of authorized signers should be kept to a minimum, while ensuring that daily business is not unnecessarily hampered.

The purpose of this internal control is to make sure that there are deliberate decisions made about who to pay, how much to pay, and when to pay bills. If you habitually have one or more checks that are pre-signed by one of the two required signatories, it defeats that purpose. If more than one signer is not regularly available, and this inhibits your ability to meet your obligations, you might consider having an imprest checking account. This means that the board establishes a policy regarding the amount of money which can be available in the checking account at any one time, say $500. All other money is kept in a separate account which the check signer does not have access to. The check signer is allowed to pay bills until that amount is substantially depleted. At that time, the treasurer or other board members may review the disbursements and make sure that they are within the guidelines established by the board. Once these disbursements have been reviewed and accepted, the authorized board representative then transfers enough money to bring the imprest account back to its $500 maximum balance.

Seek to balance your internal accounting control in such a way as to ensure public confidence and maintain the integrity of your financial systems and assets, without unduly inhibiting your ability to get on with your work. 

Internal Accounting Controls Checklist 

The following questions reflect common internal accounting controls related to paying bills. You may wish to use this list to review your own internal accounting controls and determine which areas require further action.

What is an effective internal control over cash disbursements?

What internal controls are needed for cash disbursement?

What are the most important controls over cash disbursements?

Which of the following is a good internal control for cash payments?