Assistant Professor Lehman College
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What Accountants Can Do to Keep Your Cash Safe

Jul 8th 2015
Assistant Professor Lehman College
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Not a week passes without fraud making new headlines. On June 19, the news of the largest Medicare fraud in history was announced. More than $712 million in care that was never given, or that was medically unnecessary, was billed during the last several years. And since 2007, approximately 2,300 people have been charged for falsely billing the Medicare program for more than $7 billion.

Fraud comes in many forms – misappropriation of company assets, creating fake vendors and timesheets, or simply pilfering the corporate cash register – but there is one common thread that exists in virtually every incident of fraud. Cash – whether held physically, transferred electronically, or existing entirely within the digital realm (such as Bitcoin) – is simultaneously an essential part of business transactions and a weakness that is often exploited. This is not to mention the specters of Enron, WorldCom, and Madoff that haunt financial professionals everywhere. Are the systems actually keeping an eye on transactions and assets?

The question remains – and the importance of this question is clear from the recurring stories of fraud and embezzlement of all sizes in the media – is how can cash and cash management systems be strengthened to prevent fraud?

Pillars of the accounting profession, and areas of strength that can be leveraged to fix this glaring gap, include custody and monitoring of assets, as well as designing accounting and cash systems that can better track the inflows and outflows of cash. While tracking inflows and outflows of cash might, at first glance, appear to be primarily a Treasury function and responsibility, it is important that the accounting team is involved within this as well.

Treasury and accounting often work hand-in-hand with regards to debt and interest reporting, pension and PBOP issues, and reconciling cash flows versus beginning and opening balances. It is perfectly logical, when seen against this pre-existing framework, that accounting can also play a role in building stronger systems and controls over cash, payments, and other liquidity-related issues.

The best way, obviously, to build a better system is to understand the current environment. With globalization and the increased digitization of cash, cash transfers, and business operations, the possibility of high-speed errors crippling an organization is increasing. Perhaps the most glaring example of an error that, in hindsight, should have been easily preventable is the $426 million transfer that was sent from KfW Bankengruppe to Lehman Brothers on the very day that Lehman filed for bankruptcy. Such an error earned the German lender the title of “Germany's dumbest bank” in the country's largest newspaper. If such a large amount of money can be accidentally transferred out, even with the receiving organization teetering on the verge of insolvency, what security is in place to combat motivated fraudsters and embezzlers?

Automation has made many financial transactions easier, faster, and less costly. In addition, automating and standardizing transactions, such as currency swaps and other items related to debt and equity holders, has led to greater consistency and comparability among financial statements. That said, such automation can lead to errors, oversights, and a complacency that can be exploited by accident and by individuals and organizations motivated to defraud.

Drilling down specifically to both trends in modern accounting and in the marketplace at large, it is clear that stronger and more comprehensive controls and systems are needed over cash and currency flows. As accountants are increasingly involved in IT initiatives focusing on these very issues, it is not a large stretch at all to work for a more proactive approach. It is also important to remember that cash is an asset, resides on the balance sheet (as a current asset/cash equivalent), and falls directly within a core competency of the accounting profession.

The question remains, however, is what specific measures can accounting take to improve controls and systems of cash, transfers, and digital currency overall?

1. Link account reconciliations to balances and transfers. Cash is an asset and is reconciled periodically by the accounting department, but such a lag is not acceptable in today's fast-paced business environment. Treasury is updated in real time on the effect of cash transfers – an interface should be built between Treasury modules and accounting records to run at least every night. Possible options include everything from Excel macros that can be run every evening to more complicated interface programs that can bridge two systems, if necessary. Regardless of the specific tool used, a real-time or daily interface between Treasury and accounting will undoubtedly increase control over cash and cash-equivalent assets.

2. Bring the market to the back office. Information is a valuable commodity, but oftentimes the issue is that there is simply too much data available. Writing a simple algorithm or program to identify and flag news stories related to, for instance, credit ratings, bankruptcy, or governmental investigations associated with partner firms is a must in the globalized economy. Just think of the embarrassment that could have been saved during the financial crisis if avoidable transfers could have been avoided!

3. Use existing systems to track flows. Organizations already track inflows and outflows of cash, so it makes sense to take advantage of current systems and combine them with emerging tools to further enhance control and custody over cash and other financial assets. Customer profitability, revenue management and control, and digitizing records related to vendors and payment schedules are already underway in most medium to large organizations. The key is to link these sometimes disparate systems together, have them and the people managing them communicate, and making sure that notifications are built that work between the systems.

In short, fraud and the misallocation or misdirection of cash and other financial assets is a clear and growing problem both in the United States and around the world. Accounting professionals – already integrated in both management and operations of many companies – are well-positioned to see firsthand the effects of mishandling cash and other financial assets. More importantly, accounting professionals are in the position – by leveraging and using technologies widely available – to make improvements that deliver results to both the bottom line and operations from top to bottom.

About the author:
Sean Stein Smith, CPA, CGMA, CMA, has written for a variety of publications. He is a doctoral candidate at Capella University, as well as adjunct faculty at Fairleigh Dickinson University. He works for United Water/Suez Environment as a senior accountant, and may be reached at [email protected].

Related article:

3 Ways Accountants Can Use Big Data to Fight Fraud


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