Sound accounting management - internal control for payment collection

by François Lacoste-CPA auditeur,CA, September 19 2018
Sound accounting management - internal control for payment collection

As a result of the changes in legislation for review engagements, in force since December 14, 2017, accounting professionals must pay attention to the risks of error and fraud presented by the company they are reviewing. The risk of errors and fraud will be determined by the processes and controls that the company has in place to minimize this risk. That is the reason why external accountant have been asking since December 14, 2017 more questions to determine the types of activity where the risk is higher. When the risk is higher, the independent professional will need to perform other review procedures to ensure that the type of activities he or she is reviewing is free of significant errors.

Let's start by analyzing the payment collection activity (which includes: current account, trust, corporate credit card). Throughout your fiscal year, processes and adequate controls must be put in place to reduce the risk of fraud and to discover the risks of errors. Fraudsters always take advantage of the lack of control to put their plan into action. If you are the owner of your business and you are in charge of the accounting, the controls to put in place will be reduced. However, if you have a department or more than one person involved in accounting within your organization, you then need to put additional controls in place.

The controls that need to be in place will be designed to detect any errors that the bank might make in your bank account and to detect unauthorized payments to your bank account or missing deposits in your bank account.

The bank reconciliation can quickly detect these types of errors or fraud. But what is a bank reconciliation? The bank reconciliation is used to reconcile transactions that you have recorded in your accounting system and that are supposed to be transferred to your bank account and transactions that were really transferred to the bank account of your financial institution. Any transactions listed in your bank account that you would not find among the transactions that you have recorded in your accounting system must be quickly investigated. That is why the business owner or his competent staff should always quickly review this and take care of the bank reconciliations. The bank reconciliation should be ideally completed the working day after the end of the month. As all financial institutions now give you access online and in real time to the transactions that took place in your bank account, it is no longer necessary to wait days to receive your statement by mail with the copies of your cheques as it was in the past. So, it is quite possible to do bank reconciliation weekly or even daily.

A common fraud or error we noticed in recent months is the double deposit of a check by the recipient you mentioned on your check. For a few years, financial institutions have been allowing to deposit checks through their mobile applications. As a result, the check now remains in the hands of the beneficiary, whereas previously the check was deposited at the counter. This new deposit method allows the beneficiary to technically deposit the check more than once.

Banking institutions do not seem to have put controls in place to detect the double deposit of checks. This may be of course an error of the recipient but it may also be a ploy of the recipient to obtain additional funds. Bank reconciliation will quickly detect this type of error or fraud. If you constantly wait for several months before making your reconciliations, a fraudster can realize that your controls are not adequate and may easily deposit several times a check you gave him.

If your corporation does not make a large amount of payments to multiple recipients, it would be interesting, in order to reduce this type of fraud or error, to proceed by paying online through your financial institution's portal. If you delegate this task to another staff, it is possible to configure this type of payment online so that the payment is authorized (signed) by another user (signatory of the checks). If you delegate the generation of the checks to another person, always make sure you have all the necessary documentation before signing the check (invoice copy, miscellaneous report, etc.) During your bank reconciliation process, you must ensure that the name of the payee on the check picture matches the name of the payee registered in your accounting system.

We have discussed hereabove unauthorized withdrawals into your account that may occur and ways to detect them. We now need to discuss about deposits that should be in your bank account and which would not have occurred by mistake or fraud. There are many ways you can cash the money you owe: cash, checks, credit card payments, bank transfers and e-transfers. For all these types of transactions, it will be necessary to provide controls to separate the following operations: receipt of payment, registration of payment to the accounts, preparation of the bank deposit, deposit at the bank and bank reconciliation.

Cash collection

Cash collection must be accompanied by a receipt signed by the client and given to the person responsible for preparing the bank deposit.

The bank deposit that includes cash should be ideally done directly over the counter with a counter clerk. Here we want to use the presence of an individual to detect calculation errors when depositing money.

Collection by bank transfer

When you receive a bank transfer notice, make sure to record it immediately. This step will allow you to detect deposits that would have not been made in the following days and to make the necessary verifications. Collection notices should be received by the business owner and given to the accounting staff if necessary to be recorded in the accounting system. During the bank reconciliation process, the accounting staff will ensure that all collection notices received are reflected in the list of deposits issued.

Collection through Credit Card Merchant Suppliers

It is important to have adequate documentation to track who owns this payment; it is suggested to enter the number of the invoice on the merchant copy. This copy will have to be given to the accounting department in order to verify that the total of the merchant receipts balances with the total deposit to the bank account in due time. Any discrepancies by the time of the transaction and the filing date must be investigated.

Cashing by check

When you receive checks, make sure that each check is right away stamped on the back "For deposit only" with your bank account details by your responsible staff. The check will then be given to the accounting specialist who will be able to make the entries correctly and prepare the deposit slip.

Finally, once your bank reconciliation balances and all the discrepancies have been investigated, the business owner must review the following documents: the bank reconciliation summary showing that the bank balance is correctly entered and matches the balance of the bank statement, the details of the checks issued which corresponds to the total mentioned in the summary, the details of the deposits which must correspond to the total entered in the summary, the details of the adjustment entries, the list of deposits in circulation and the list of checks in circulation. The owner who reviews the bank reconciliation should be able to trace all documentation to justify all amounts deposited and withdrawn from the bank account. Items in circulation must be investigated according to the date of the transaction. It may be normal for transactions towards the end of a month not to be cleared at the bank. There should be very few transactions made by journal writing. Generally, we try to track account records to identify transfers between different bank accounts of the company and bank charges. All other transactions must be accounted for either as customer receivable or supplier payable.

In addition to the recommendations mentioned above, it may be worth mentioning that you should avoid signing blank checks while you are away. Instead, authorize the double signature during your absence by two trusted staff. Or why not have post-dated checks prepared! Moreover, when closing your fiscal year, you must ensure that the demarcation of transactions is adequate. It should be stipulated that if you make your checks by hand and not automatically issued by your accounting system, all checks issued will be recorded on the date of issue and not on the date of disbursement. Same thing for the deposit, if you prepare your deposits by hand, you must make sure that it is accounted for on the date that you have prepared it and not on the date it was deposited in your bank account.

Conclusion

Based on the information you will provide to your accountant when completing your financial statement review, he/she will be able to determine whether your collection process is a potentially anomalous item or not. Therefore, as an accounting expert, he/she may be able to develop other review processes to reduce the risk of anomalies. Your year end is coming soon, prepare the description of your accounting procedures and ask your external accountant about potential improvements to be applied if necessary!

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