Approval Of The Companys Purchases

Published Date: 02 Nov 2017

As for the hotel industry, the process differs since there is one fixed float per outlet and at the reception. This one float is used by all the employees on shift. In one of the hotels, one of the persons on shift collects the float before the shift and signs for it. This is an internal control for the person who collects the float to assume responsibility for it. After the shift, the same person places the money in an envelope and deposits it in the safe. The difference with the second hotel is that after the shift, the float is passed to a security manager where he checks the money to establish if the float is under. In the case of the second hotel, there is the involvement of another person when handling the money.

For both the restaurant and the pharmacy, there is a common cash register for all employees on shift.

Some of these companies have a procedure in place whereby if the cash float is understated or does not tally, employees, during the shift when such cash was unaccounted for, have to make good for the difference since taking care of cash was their responsibility.

Segregation of Duties

For the I.T. Training School, employees both invoice and collect money from the client. At the end of the day, the employees hand over the cash together with the invoices to the General Manager and these are vetted. Afterwards, the General Manager hands over the cash and the invoices together with an end-of-day report to the Managing Director where the latter signs on the end-of-day report that money has been correctly received.

In the insurance industry, both companies stated that the person who invoices and collects the money is the same person. In addition, for the insurance broker, the person who prepares the deposits is different from the person who deposits the money, while for the insurance company the junior clerk is responsible for preparing the deposits which are later picked up by the security van.

The supermarket, the white goods retailer, the restaurant and the pharmacy all have employees who are client-facing only, and one of the owners is responsible for preparing the deposits.

Approval of the Company’s Purchases

Five of the respondents pointed out that orders are made by the owners of the companies, thus no approval is required. On the other hand, the remaining seven respondents explained that purchase orders are prepared by certain employees and approval has to be obtained from managers or directors. In some cases, such as supermarkets, purchase orders are approved by a director and the divisional manager. In the case of hotels, orders are amended if necessary and approved by the cost controller and other key senior personnel.

Other Internal Controls

Other internal controls pointed out by some of the companies include regular deposits at the bank; the presence of a witness during the preparation of money in security envelopes for pick-up by security vans; random spot checks carried out on cashiers; and the use of safes and their restricted access. An important internal control mentioned by some respondents was that the owner is the sole person who has the cash at the end of the day.

Since supermarkets deal with high cash balances due to the nature of the business, management highly encourage customers to pay by credit cards, thus reducing the risk of theft or misappropriation of cash by staff.

Figure 4.2 depicts the common internal controls implemented by the majority of businesses with respect to cash.

Figure 4. – Common Internal Controls

4.4.3 Fraud Victims

The greater part of the respondents never experienced theft of cash from their employees. The only two businesses which suffered theft of cash were the hotels. Both hotels implied that the cash amount stolen was not considerable; however, following such theft they implemented more measures to ensure that such an incident would not occur again.

Measures adopted include the participation of a witness in the case of the first hotel, while the second hotel requested the handing over of cash received during the night to the morning staff on duty.

Cash Payment Limit

The purpose of this section was to obtain information on whether interviewees were aware of cash payment limits together with their feedback and personal views.

Ten out of the twelve respondents admitted that they were not aware of the cash payment limit being set by Governments in some EU countries. Only two persons were aware and knowledgeable about this subject.

The majority of the respondents agreed with such a cash payment limit. Only one respondent disagreed with this limit while two interviewees expressed that they are undecided about this matter.

All of the respondents stated that, if such a cash payment limit was to be introduced in Malta, there would not be serious implications for their businesses. This is because some of the goods sold or services provided by certain businesses are not high in value and would not affect them. Having said this, owners expressed concern that the company may incur higher bank charges due to the increased use of credit cards.

Questioned on whether interviewees thought that such cash payment limit would be difficult to adopt in Malta given our culture, eight respondents implied that it would be difficult to adopt due to the Maltese society and its mentality. Three respondents stated that if there is proper know how, it should not be difficult to adopt.

Interviewees were required to suggest an appropriate cash payment limit. Replies ranged from €500 to €5,000. One of the respondents implied that a limit could not be given since such limits should be based according to the industry in which they are operating.

The last question asked whether the interviewees thought that such cash payment limits be introduced as either a law or a proposition. Six out of the twelve respondents implied that it should be a law otherwise no one would adopt it. The remaining six respondents stated that it should be a proposition, leaving it up to the business to decide whether to adopt it or not. A respondent pointed out that should this matter be introduced as a proposition, the company would not implement it but will closely monitor those companies who have chosen to adopt this proposition.

Conclusion

This chapter presented the findings of the companies interviewed. The next chapter discusses the findings documented in this chapter.

Chapter 5: Discussion on Findings

Chapter 5: Discussion on Findings

Introduction

This chapter shall discuss aspects that have emerged from both the literature review and the findings.

The purpose of interviewing different companies from a variety of industries was to gain insight into a wider spectrum of companies operating in goods and services.

Since the majority of enterprises interviewed were family owned businesses, the analysis mostly reflects the use of cash within this type of SME.

The Utilisation of Cash

Payments by Customers & Payments of Supplies by Businesses

As it transpired from sub-section 4.3.1, the use of cash is minimal as payment is generally effected through other means. However, customers still use cash when paying for items of low amounts such as stationery or daily grocery items.

Figure 5. – Payment Methods

From Figure 5.1, a balanced number of cheque and credit card payments can be noted as a common method of payment by customers.

It is interesting to note that businesses which expressed that the use of cheques is the most common method of payment by their customers provided a service rather than the selling of goods, with the exception of the white goods shop. The majority of companies accept cheque payments upon presentation of an Identity Card. Acceptance of foreign cheques is not allowed by some of the enterprises. The main reasons are twofold; firstly, cheques drawn on foreign banks may involve excessive bank charges, and secondly, they may be harder to trace should the cheque ‘bounce’. The latter reason presents an added risk for businesses since one is more likely to defraud through the utilisation of cheque payments. Businesses must adopt a cautious approach and implement policies and procedures to be undertaken by staff when accepting cheque payments. This would include ensuring a valid date, checking whether the signature might be forged, ensuring that the cheque is drawn on a reliable bank and taking note of Identity Card details on the back of the cheque.

The use of cheques may be considered convenient both from the customers’ point of view as well as for the recipients of cheques, that is, businesses. With respect to customers, it is more efficient to pay by cheque and they can also value date the cheque so that it would be transferred when funds are available.

Though cheque payments might not be the most efficient payment method from the businesses’ perspective since they would need to deposit such cheques, this payment method provides advantages to businesses. Firstly, there is additional security when clients mail payments to businesses, since the recipient of the cheque is able to present and cash the cheque. Secondly, businesses such as the I.T. training school, the website development company and both companies in the insurance industry receive either payments for course fees (I.T. training school) or renewal payments (website development company and insurance companies). Thus, it might be more suitable for the customer to mail payment for such services. Thirdly, businesses consider this a fast payment method due to not actually having to physically deal with the client at the office desk. Thirdly, cheques are easily traceable since they provide information such as the details of the recipient, the person who signed the cheque, the payment amount and when the bank cleared such cheque.

On the other hand, the use of credit cards was a preferred method of payment among customers purchasing goods. Credit cards are considered convenient, secure and safe for individuals, thus individuals may hold little or no cash at all in their wallets. Also, payments effected by credit cards may be viewed almost instantly via Internet banking. These factors are therefore contributing towards increased credit card use.

The discussion on payment methods from the other perspective, that is, payment of supplies by businesses, is more straightforward, as depicted in Figure 5.1. The majority of companies still effect payment of supplies by cheque, with some opting for bank transfers as their second preferred method of payment. This shows that there is more accountability and that payments can be easily traced if required. In fact, this conforms to the literature presented in Table 2.2 since the percentage of cheque transactions is the highest among the 27 EU Member States.

With today’s continuous advances in technology, commerce is moving towards a more electronic environment. Apart from credit cards, the use of Internet banking by both individuals and businesses is increasing. In fact, some owners of businesses who deal with payments to suppliers themselves admitted to using Internet banking apart from cheques. Having said this, where payments to suppliers are prepared by employees, cheques are still commonly used since employees do not normally have access to the company’s Internet banking system.

At present, in Malta, certain payments may be effected through secure downloadable applications on smart phones designed by local banks.

It is quite evident from the findings that the use of cash is minimal and on the decrease with businesses making less use of it than customers. Apart from this, the future trend is that customers will effect payment by credit cards, while for businesses, the future trend of payment to suppliers is slowly diverting towards the use of online banking. Thus, in both cases, there is the use of at least one form of electronic payment.

Cash Policy

The purpose of a cash policy is to ensure that employees are aware of the process of cash handling to avoid mishandling of cash. The following remarks may be pointed out from the findings.

Companies that are likely to implement cash policies include those having several employees dealing with cash transactions at different stages of the cash handling cycle such as restaurants and hotels. On the other hand, sole traders are less likely to have a cash policy, which makes this type of environment more susceptible for fraud to take place.

If cash policies are in place, the whole process can be overseen and random spot checks can be caried out constantly, leading to proper cash management. Cash policies act as a deterrent since employees would be expected to know and conform to such policies. Also, lack of cash policies in place can have a negative impact on the auditors’ perception of the company’s cash management practices.

Internal Controls on Cash

Cash Handling

As pointed out in Section 4.4.1, the fact that certain employees have access to the cash box at end-of-day requires more attention from management. With respect to both companies operating in the insurance industry, frequent cash counts have to be performed on the cash box of randomly chosen employees. The fact that these companies provide individual cash boxes show that sole responsibility has to be taken by each employee. On the other hand, in the hotel industry, multiple employees on shift have access to the same cash box. This necessitates the need for more supervision than for individual cash boxes, since fraudulent acts involving collusion between employees may lead to theft of cash.

The practice of frequent cash reconciliations is important for various reasons. Firstly, management would be alerted to any inconsistencies that may arise between the system’s readings and the monies in the cash box. Thus, corrective action can be taken in a timely manner for any discrepancies. Secondly, cash reconciliations may act as a deterrent for employees, especially where common cash boxes are used, therefore reducing the risk of cash embezzlement. Thirdly, cash reconciliations are considered important for audit purposes since the practice of regular cash reconciliations will be taken into consideration when assessing the risks relating to cash.

The Implementation of Internal Controls

The study shows a number of internal controls in place which in most cases were common across all the enterprises interviewed. Owing to the different structures of enterprises, particular internal controls were implemented by certain types of enterprises, for instance, the supermarket. Since the latter deals with considerable amounts of cash by nature, management implements an internal control whereby the person responsible has to prepare deposits daily or twice daily for pick-up by the security van. These are considered good practices since frequent deposits reduce the risk of cash misappropriation and theft, while use of security vans ensures secure transfer of cash. Other common timeframes, apart from those mentioned above, included weekly or twice weekly cash deposits.

On-going evaluation and monitoring of internal controls where discrepancies in cash have been identified are crucial to make sure that any improvements required are made. It is of vital importance that strict rules are imposed when there are discrepancies in cash.

Segregation of duties seems to be another internal control that is considered as highly important. This could include the involvement of at least two persons when cash handling takes place, to reduce risks, as more people will be held accountable. Also, companies should have a list of authorised signatories whereby, for example, payments above a certain amount would require two or more signatories. These should be clearly stated in the policies of the company.

Other significant internal controls include the use of safes in the company’s premises and their restricted access to employees. Also, management should provide money counterfeit machines at each cash point to reduce the risk of receiving counterfeit money.

The collection of cash from employees at the end of the day is considered by some owners to be an effective internal control. However, one must not fail to remember that the owners themselves may perpetrate cash fraud. This includes acts such as tax evasion whereby an employer may deflate his revenue figure in order to pay lower taxes. Thus, one must not simply rest on the notion that since cash is being held by the employer, nothing can go wrong.

Businesses should keep in mind that the creation and implementation of internal controls impose legal obligations on management. Staff and clients have a right to privacy within the parameters of the law and this should be adhered to. Therefore, companies should be cautious when implementing certain controls on customers.

With regard to the approval of company’s purchases, one respondent pointed out that purchase orders drawn up have to be in line with the short-term budgets prepared by management. This ensures that no payments for unnecessary purchases are made, thus reducing the risk of fraud disbursements, as explained in the literature review.

When compared to the literature, almost all of the internal controls mentioned are present in the companies interviewed. Time and efforts spent on implementing and monitoring internal controls with respect to cash are not to be viewed as a cost but rather as an investment in safeguarding this vital asset of the company. Figure 5.2 portrays the important characteristics for having effective internal controls.

Figure 5. – Characteristics for Effective Internal Controls

An internal control that could be considered as beneficial for certain businesses but unfortunately seems to be lacking importance is the transfer of duties to another employee when one of the employees responsible for cash handling is on leave. This serves as a check for management to monitor and ensure that the job is being done in a proper manner.

Maintainability of Internal Controls

Strong internal controls will not prevent fraud or theft, however, they minimise the possibility of employee fraud. Nevertheless, having internal controls in place does not mean that management should put their mind at ease. Instead, management should periodically perform assessments on internal controls to identify any weaknesses. Such weaknesses should be rectified as soon as they are established since they may act as loopholes for employees to try and commit fraud. Figure 5.3 presents the cycle involved for maintaining internal controls. This should apply to all companies with special reference to companies having a high number of staff members on different shifts.

Figure 5. – Internal Controls Maintenance Cycle

Fraud Victims

The study ascertains that enterprises do in fact suffer theft of cash by their employees. Both hotels were fraud victims in cases where employees stole cash before such cash was posted in the accounting system. Thus, asset misappropriation took place through skimming; one of the three instances of asset misappropriation described in Chapter 2. Owing to the checks in place by senior staff, such fraud was identified and action was taken immediately.

A precautionary measure adopted by one of the hotels following the theft included the presence of a witness. The four eyes principle would be adopted with the inclusion of another employee during the deposits preparation process. In this way, one is minimising the risk of misappropriation of assets and theft.

The second hotel implemented an additional measure involving the handing over of cash received during the night shift to the morning staff on duty. This was introduced in order to have the involvement of another person when handling cash since the theft occurred when one employee was solely responsible for the cash box.

Where fraud has been identified, such loss should be recorded and reflected in the financial statements immediately. In addition to this, it is crucial for management to take the necessary steps to avoid repetition of such fraud.

Cash Payment Limits

From this research, it is evident that the respondents are in agreement with the introduction of cash payment limits. Nevertheless, one still has to examine whether there are any long-term repercussions due to the fact that these limits have only been implemented in recent years.

One of the initial repercussions to be discussed should be the implications on the increased use of traceable methods. As already pointed out in the previous section, through the use of credit cards and cheques, businesses could be faced with bank charges and ‘bounced’ cheques, which might not be recovered.

Thus, Governments should consult and negotiate favourable terms with local banks to aid businesses in this respect.

A possible repercussion with regard to the use of credit cards might be that if banks do not agree to better bank charges, companies might eventually consider implementing a policy whereby the bank charge which is charged to the company is passed onto the clients via an additional charge should the client opt to pay by credit card.

Nevertheless, several advantages may be foreseen from such introduction. Firstly, involvement in black economies will decline since non-cash payments produce digital trails. Secondly, less cash-in-hand will be safer for both staff during cash handling processes and for the general public. Thirdly, burglaries might decrease since the public, especially older generations, will not keep high amounts of cash at their residence.

Another aspect which has to be pointed out is that such payment limit will not affect each industry in the same way. For example, a €1,000 cash limit will not affect restaurants since clients rarely exceed this limit. On the other hand, this limit might affect clients purchasing from a white goods shop. Thus, should this cash limit be introduced in Malta, it might be fruitful for the Government to propose and adjust limits for different industries as it deems appropriate.

An examination of the literature with respect to cash payment limits revealed that, in almost all of the countries mentioned in Chapter 2, this issue was addressed by the introduction of law. On the other hand, a small number of countries did not impose such a law but instead required identification of customers or introduced such an issue by way of a proposition for businesses. This issue should be introduced as a law since the majority of companies will not implement it if it is a proposition, especially if they have nothing to gain. At present, there is no law being imposed by the EU regarding cash payment limits. In addition, even if the EU will gradually impose it, one has to adopt a practical approach. This is because, since Malta is one of the smallest countries in the EU, it might encounter different problems when compared to larger European countries.

Conclusion

This chapter discussed aspects of the findings presented in Chapter 4. The next chapter shall contain a summary together with recommendations and conclusions for this dissertation.

Chapter 6: Summary, Conclusion & Recommendations

Chapter 6: Summary, Conclusion & Recommendations

Introduction

This chapter summarises and concludes this dissertation. Section 6.2 presents a summary of the objectives whereas Section 6.3 provides their respective conclusions. Section 6.4 outlines the recommendations, and areas for further research are explained in Section 6.5. Concluding remarks will follow in Section 6.6.

Summary

The study analyses the use of cash, primarily focusing on ‘cash-in-hand’, in local SMEs. It aimed to assess the extent of utilisation of cash transactions by Maltese corporate entities and its officials vis-à-vis other methods of payment. The examination of internal controls and policies in place for safeguarding cash were delved into. Information and feedback from interviewees on the regulation of cash payments were also evaluated.

The objectives were achieved through twelve semi-structured interviews from both the retailing and the services sector, with the majority of them being family owned businesses.

The study revealed that the number of payments effected in cash by both businesses and customers alike is low since other preferred methods of payment have been established. Nevertheless, adequate internal control practices by businesses are put in place to safeguard cash handling.

Knowledge regarding cash payment limits among interviewees was low or nil. However, when such a matter was explained to interviewees, there was a mutual understanding and agreement between most of the respondents on the positive benefits this may have on the economy. Some minor drawbacks were, however, identified.

Conclusions

The study concludes that with regard to the utilisation of cash, the use of cash is not the most common method of payment by the majority of businesses and their customers. In fact, overall, respondents implied that the use of cash has decreased in recent years and is being replaced by other methods of payment including credit cards, cheques and online banking. Consequently, there has been an increase in the use of electronic money.

Internal controls addressing cash handling are present in the majority of businesses under review. Nevertheless, there is still room for improvement for the proper implementation of internal controls. Internal controls which have been identified as being in place range from the controls during the process when cash is passed from the client to the front-line employee, to controls while an employee prepares deposits. This ensures that cash is safeguarded throughout the cash handling cycle.

In businesses where cash fraud takes place, management investigates and places extra internal controls to make sure that such theft will not be repeated.

Even though internal controls may be expensive and time-consuming to implement, employers must acknowledge and understand that efficient and effective internal controls will prevent waste, larceny and embezzlement of the company’s resources, particularly cash.

With regard to the introduction of cash payment limits, respondents acknowledged and understood that such a limit would restrict customers from paying fully in cash for an item priced over a specified amount that is established by the Government. In addition, embracing such introduction will eventually reap positive benefits for the economy as a whole such as prevention of tax evasion and more transparency.

This concept may also be considered beneficial for countries aspiring to instil in their citizens the norm to start paying for goods and services using methods of payment other than cash. This will eventually lead the country to create a ‘cashless’ society, since the use of cash will decrease significantly. However, one must take into consideration the cost of using electronic money at all times.

It is of significant importance that businesses are proactive and alert for all technological advances and innovations that might cause a shift in the way businesses operate.

Recommendations

The study recommends:

The Creation of a Cash Policy

A written cash policy is considered of great importance for all enterprises. This is equally recommended for enterprises which are solely managed. Furthermore, management should dedicate a section in the cash policy in order to promote a culture whereby employees can report suspicious acts of fraud to management.

An Increase in the Number of Internal Controls Implemented

Employers should be pro-active in implementing internal controls, particularly to discourage collusion between employees. Apart from this, management should also identify those internal controls which may be overridden, and take necessary action to rectify these internal controls.

The Importance of Supervision in Cash Handling

Although it might not be considered ethical, management should perform background checks on potential employees who will be working in certain sensitive areas of cash handling. Employees should be aware of the negative consequences of mishandling of cash.

The Introduction of a Cash Payment Limit

A smooth introduction of a cash payment limit should mean that a reduction in the costs of using electronic money, such as credit card fees, should follow. Therefore, negotiations with banks should be held to discuss such costs in order to ease the financial burden on businesses.

A recommendation in this respect might be that consultations with the public at large should be held in order to establish the best limit for the country, thus ensuring that the best economic decision is made.

The Introduction of Policies Relating to Online Cash Transfer

The use of online banking for effecting payments to suppliers has increased, although it is still not yet commonly used. More protection is required when transferring money, which can be achieved through the introduction of policies relating to online cash transfer. Such policies would include the roles and responsibilities of the persons in charge of the company’s Internet banking system, and the specific access rights of the respective persons would be outlined. Procedures and controls in place are to be explained; for example: transfers above a specified amount would be authorised by at least two persons using their individual Internet keys, making at least two persons accountable.

An Increased Awareness of Technological Advances in Businesses

Businesses should be constantly proactive and aware of the technological advances which are leading countries to slowly move towards being‘cashless’ societies. On an international level, a recent technological innovation is the use of near field communication [1] (NFC). This technology allows the owner of a Smartphone to download a secure mobile application and install a particular SIM card whereby it allows the customer to make payments by simply waving the Smartphone at specific NFC terminals (Hanlon, 2012).

Alternatively, customers may use their special VISA Cards, namely, ‘VISA payWave’ instead of their Smartphone. These cards incorporate a tiny microchip in order to transmit payment details securely to specific payment terminals (VISA, 2013).

Although the NFC technology has not yet been introduced in Malta, this is the way forward for the country.

Areas for Further Research

Further Studies on Asset Misappropriation and Internal Controls

An area for further research could include the analysis of different cultures to determine common and distinctive aspects of asset misappropriation. On a similar note, an analysis could be carried out to determine whether a relationship exists between the behaviour of employees and the types of controls required to prevent fraud.

With respect to internal controls, research could be carried out to identify controls to detect fraud rather than preventing fraud.

Electronic Payments

Interesting research could include a study relating to the technology of NFC and its impact on Europe, with particular reference to Malta.

Method of Introduction of the Cash Payment Limit

Should Malta decide to adopt this cash payment limit, further studies could be carried out on the best approach to be adopted to ease the introduction of such payment limits.

Concluding Remarks

The decrease in the use of cash in relation to other methods of payment is encouraging for the simple reason that non-cash payments can be traced and less fraud can take place.

Given the size of companies under review, it seems that sufficient and effective controls, policies and procedures are in place. Nevertheless, there is always room for improvement. Continuous monitoring and improvements ensure proper control, especially where these SMEs have the potential to experience business growth. Employers are the persons who set the tone of the business, and as a result they have to lead by example and demonstrate the importance of adhering to internal controls.

With respect to cash payment limits, one has to adopt a practical approach when discussing such an issue in relation to Malta, since Malta is one of the smallest countries in the EU and does not have the same problems as other countries.

List of References