How to Have Good Internal Controls for Cash Disbursements

January 11, 2022

This video goes through the five components of internal controls regarding your vendor setup. What seems like a simple task may have several pitfalls. Adding controls can help prevent fraud. Some of those pitfalls and controls are discussed in this video.


Transcript

charles Saydek: Hello, I’m here to help you with your internal controls for cash disbursements. How can we have good controls over cash disbursements in a small to mid-sized Company? I only have a few minutes, so I will focus on the first step, your vendor setup. You can go through similar steps for other risks you identify such as receiving invoices, payment approval, and payments.  So let’s go through our fundamentals we learned from the first video.

First, it is imperative that you and your management team take the process of disbursing money, and in this case the vendor set up, extremely seriously. The tone at the top is about integrity and ethical behavior. Policies should be followed, and monitoring and review should be done openly. When I say openly, I mean the people who are authorized to do the work see that there is someone reviewing and checking their work.

Second, risk assessment. What are the risk regarding a new vendor? For one, the vendor may not be real. I remember a nursing home that purchased 100 new beds. However, no one could ever find those beds. It turned out the AP clerk created a company, sent an invoice, and paid the invoice.  Are there vendors with similar names?  There have been plenty of instances where the AP clerk creates companies with similar names to get invoices approved and paid.  So we know that the vendor data can create risk.

This leads to our next assessment, control activity.  What policies and procedures could you set up to prevent errors or fraud?  You could require W-9 forms from vendors, create a vendor request form to be completed and signed by someone outside of the accounts payable department and reviewed and approved by management, review vendor listings for duplicate vendors, or vendors with similar addresses, and making sure any changes to vendor data are authorized and memorialized.

Through all these processes, open communication is essential. Sales, purchasing and other departments should be discussing new vendors, cancelled vendors, and updates to vendor data in meetings and/or with the management team.

And finally monitoring. When we know someone is watching, the chances of doing something fraudulently is reduced. Generating reports to review for duplication of vendors, similarities of vendor names, and duplicate or similar vendor addresses is a good step. Reviewing weekly change reports on vendor data is also important. Verifying vendor request forms are set up properly and authorized is another way to monitor. All unusual items discovered in your monitoring of the vendor data should be investigated which will demonstrate to the accounts payable department that you and your management team are watching.

About Charles J. Saydek

Charles J. Saydek is a Director in the firm's Private Business Services Group and specializes in tax services and retirement plan audits.


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