Handling cash

Requirements that tend to be forgotten

Some ten years ago, use of cash started declining significantly – wages began to be paid mainly by direct deposit, and advance payments and reporting of business expenses also began to be settled through banks. For the purposes of this article - we won’t cover companies who pay undeclared salaries to evade taxes.

In the interests of clarity, we’ll also omit requirements for e-money or cash handling in the financial sector. The scope will be limited to ordinary cash drawer, whether it is meant for payroll, receiving revenue from customers or other purposes.

Rules and regulations

The Accounting Act does not directly set out requirements for cash transactions. But the general accounting rules valid for the public sector (Estonian title as of 2017: “Avaliku sektori finantsarvestuse ja -aruandluse juhend”, Public sector financial accounting and reporting guidelines) establish very specific requirements for cash. As there are no specific requirements for the private sector, I recommend that private sector companies proceed from the requirements established for the public sector as a good example, as by their very nature, the requirements are relevant in both sectors.

The regulation sets forth that if a state accounting entity has cash in hand, the state accounting entity must establish rules for cash handling. Among other things, it sets forth a maximum limit for the cash in hand, the procedure for paying cash into bank accounts within the electronic state treasury and requirements for documenting, inventorying and ensuring security of cash in hand [1]. The cash handling rules do not have to be a separate document, it can be just one chapter in the accounting policies and procedures. The content is what is important, and that the key rules are stipulated.

The maximum limit for cash in hand – When the company is required to take the cash to the bank? In retail sector or in other companies where a customer cash drawer, cash in the accounting department and a bank are involved, it is important to establish procedures as regards the balances at which money has to be taken to the “next level”, as it were. Looking at the inventories as of autumn 2016, we have seen situations where the cash balance in a shop or factory’s sale cash register has reached a very large amount and even though the company has established a rule on maximum cash amount, it is not adhered to. This in turn leads to various material and security risks.

Security requirements, including procedures for taking cash to the bank – Who takes the money to the bank, when and how? If an employee is the one to do this, is his or her security guaranteed? Or has the service been outsourced? Public sector entities should be reminded of the requirement contained in the regulation as well – a cash order from the cash in hand must be approved by another person besides the treasurer [2].

Here again, we can cite an example of how the accountant in a small Estonian town took the contents of the company’s cash register to the bank every week on a specific day. Many people knew when she did this and how much she was usually carrying in her purse.

When it comes to security requirements, every company should think about where their cash register is located. Is a metal box in the top drawer of the cabinet really appropriate and secure? Is it safe for the treasurer to keep a large amount in the store’s cash register? In the case of large amounts, it is wise to think about how the cash is transported within the company. Attentive consumers have maybe noticed a system used in retail to transport money in mechanical and secure fashion - from the cashiers’ tills to the company’s main cash deposit safe.

Documentation

When it comes to documentation flow, every accounting unit should think through the most suitable design for the procedure. All companies are different, including from the aspect of how and where the cash accrues. The process has to be designed accordingly. It’s clear that cash receipts and expenditures have to be documented with corresponding documents– whether money is being taken to the bank or a disbursement is made to an employee to cover a business expense. Whether some other document is drawn up in addition to the cash orders is a matter of the oversight process at each given company.

I also want to bring up another example of how not to do things. A company’s cash came from sale of goods straight from the warehouse. The cash was simply taken to the “big building” without any documentation of the movement between warehouse and accounting, and thus it was hard to ascertain later how much sales volume had been transacted in cash. But the accountant made disbursements to its employees to cover business expenses, issuing the money in exchange for an expense document. No orders were drawn up, no signatures were elicited. The receipt brought in by the employee went into a drawer. So it wasn’t possible to determine later on how much justified expenses were paid from the cash drawer and how much money had simply absconded from the cash drawer. The total losses for the company from fraud spanning several years totalled around 100,000 euros.

Inventory of cash in hand

The government has set forth in a regulation that an inventory of cash in hand is to be carried out once a year [3].

A regulation valid for the government sector sets out the following procedures for inventorying cash [4]:

  1. In the course of the inventory, the cash in hand is counted and the results are documented in a cash inventory report, which is to be signed by the participants in the inventory and forwarded to the accounting unit;
  2. In the accounting unit, the conformity of the cash inventory report is checked against the cash balance as recognised in accounting, the inventory report is approved by the accounting department’s representative by signature and with the addition of comparison date; deficits are recognised on account  until they are compensated, and surpluses are entered into revenues.

Although it is obligatory to perform a cash inventory at least once a year, the process is essentially one that should be performed even more often. Here as well, the state has established a more detailed requirement – an unannounced check of cash in hand must be carried out at least twice a year [5].

But I would encourage every company to evaluate the need for unannounced cash counts in conformity with the speed and amounts of cash turnover. In other words, it would be appropriate to do this three or four times a year.

In the course of the unannounced cash count, the following should be checked:

  • Are appropriate cash orders in place, and do they have the right numbering so they have not been changed?
  • Does the cash balance match the accounting data at the moment of the inventory?
  • Are all necessary documents there – the receipt and payment orders, bearing the signatures of both parties?

In the course of audits, we have seen, for instance, a situation where cash order numbers were generated by an accounting program in an automatic sequence. Everything seemed in order at first, but later it turned out that the numbers could be manually changed in the system. Thus it wasn’t certain that the orders issued actually were in sequence, or whether a given number had been used more than once. For that reason, it was possible to commit systemic fraud, by removing money from the cash drawer.

  • Who performs the cash inventory – if it is the accountant responsible for accounting for cash and/or person responsible for the cash drawer, then the inventory would not serve its purpose. When forming the cash inventory committee, the same rule that applies to assets inventory should be applied – the committee must consist of people who don’t know the balance and cannot look up that information from the system beforehand. This is the only way to ensure independent and objective verification.

Responsibility for cash in hand

It’s clear that responsibility for cash in hand has to be set forth very clearly and unequivocally – both the identity of the person responsible and related rights and responsibilities. Here, too, the government requires that the responsibility of accounting unit employees is set forth in written job descriptions [6] – i.e. in the job description of the accountant who is responsible for cash. The Employment Contracts Act also specifies that contracts signed with employees must include a description of job duties [7].

Another question concerns whether the treasurer also has proprietary liability for cash. Here I would strongly counsel one and all: if you have not entered into proprietary liability agreements under the Employment Contracts Act in force and do not pay the employee in question monthly compensation that is independent of salary, the employee has no proprietary liability.

The employee lacks liability even if you have a corresponding signed contract dating from before the current Employment Contracts Act entered into force, or the liability is specified as an obligation in the contract concluded back then.

For proprietary liability to be applied, a specific agreement must be signed, based on the requirements stated in the Employment Contracts Act, and the employee must receive monthly compensation that is not included to his/her salary.


[1] Subsection 17 (2) of the public sector financial accounting and reporting guidelines

[2] Subsection 15 (6) of the public sector financial accounting and reporting guidelines

[3] Clause 50 (2) 5) of the public sector financial accounting and reporting guidelines

[4] Subsection 52 (1) of the public sector financial accounting and reporting guidelines

[5] Subsection 51 (1) of the public sector financial accounting and reporting guidelines

[6] Subsection 15 (2) of the public sector financial accounting and reporting guidelines

[7] Clause 5 (1) 3) of the Employment Contracts Act

 

Author: Siiri Antsmäe