Traditionally one of the most significant challenges facing the Cash Management industry has been managing threats to the physical security of funds, establishing the need for internal controls over cash management.
The industry continues to meet the increasing demands of improved processing, efficiency and value for money. Nevertheless, Cash Service Providers (CSPs) face the continuous threat of correctly accounting and controlling the cash they are processing.
The risks associated with poor controls and reconciliation processes can be significant. There are numerous examples across the industry of substantial losses occurring as internal theft or inadequate controls that are not detected. For example:
- In Europe, a leading CSP was forced to exit the local market following a loss of control in accounting for their clients’ funds. There was no apparent physical theft. The organisation incurred a significant financial loss, and it could not determine which funds were related to which client.
Combined with the reputational impact, the business underwent a major corporate restructure and terminated its cash processing services.
- In Asia, a major player in its market suffered a loss within its ATM operations following internal fraud/theft over a prolonged period.
The theft should have been prevented, but the CSP was forced to settle a significant claim with its ATM client due to a lack of management oversight and inadequate controls.
Reconciliation ensures that two sets of records (usually the balances of two accounts) are in agreement.
This does not necessarily mean that the balances actually match. Often positions are agreed by considering identified movements or transactions.
Cash Service Providers require an internal three-way reconciliation that covers the following:
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Physical Funds
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Internal Processing Ledgers
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Customer Report
This is important as it represents the position under CSP control for checking, reviewing or auditing.
A subsequent reconciliation between the Customer Report and the client’s own accounting records is necessary. This is a critical process as it establishes the CSP’s position with its customer.
It is also one of the more difficult areas to agree upon, given the relationship between both parties.
Why Reconcile?
Cash reconciliations are a critical function in any cash operation:
- First and foremost, by controlling and recording transactions, they support all cash handling functions and activities throughout the process.
- They assure the correct treatment and management of funds, both internally to the CSP and externally to clients.
- Lastly, it protects the organisation from extended or significant financial liability.
Severe implications often occur when failing to perform reconciliation controls:
Financial Loss
The liability of lost or unaccounted funds under the control of the CSP resides with the business.
Accordingly, the CSP must repay any shortfalls and losses if it cannot determine the source of these amounts.
Regulatory Penalties
In many cases, cash processing & reporting is an integral part of a Central Bank’s objective in ensuring an adequate supply of cash within the economy.
If this data is incorrect, the party at fault can be subject to material penalties and censorship.
Reputational Issues
In a competitive environment, issues or losses can severely impact the reputational credibility of a business, both with its clients and within the industry as a whole.
This has a contagion effect on its ability to acquire or retain work. Thus, eliciting the need for internal controls over cash management.
Management Concerns
Reconciliations are a vital tool in assessing the control infrastructure of an operation.
If these are missing or inadequate, it is difficult for management to determine whether its cash processing is operating effectively or not. You do not want your client advising you of problems that exist.
Internal Controls Over Cash Management Failures
So, what types of issues arise with limited internal controls over cash management?
No Balancing of Funds – Not matching your physical funds to your internal records or the report going to the client.
Inadequate Segregation – between processes or between clients, making it impossible to determine where the issue arose when finally discovered.
Lack of Documentation – no physical or electronic paper trail to control the movement of funds across the operation. No audit trail to assist in investigations in the event of a loss or a claim.
Inaccurate Customer Reporting – Not checking the accuracy of your customer reports by not obtaining client verification on whether the submitted information matches their position.
Insufficient Management Information – No escalation of balancing issues or key metrics (e.g., number and frequency of customer claims) to monitor performance.
No Independent Validation – A lack of security or audit checks on compliance does not provide independent verification of reported positions.
Due to the nature of issues that arise from reconciliation problems and the resultant potential financial and reputational losses, cash reconciliations require appropriate controls.
The Cash Service Provider – Client Relationship
Reconciliations are vital in the relationship between a CSP and its client.
Providing data on its cash position through an agreed reconciliation and control infrastructure maintains the service’s credibility between both parties.
A robust control and reconciliation process is essential to the client as it:
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Assists in managing overall cash positions to meet demand and forecast future requirements of its own customer and branch base.
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Meets regulatory requirements for Central Bank reporting and ensures an adequate supply of correct denomination and quality of note as required by the relevant regulatory body.
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Provides revenue generation through the supply of cash and cost savings by minimising the cost of funds through effective utilisation of its cash holdings.
Therefore, it is incumbent on the CSP to ensure that their client attains enough assurance of their control environment and the accuracy and validity of the cash activity and positions performed.
However, the client also must provide confirmation or otherwise on any reported position provided by the CSP. This is critical as part of the reconciliation process between the client and the service provider.
Unfortunately, this is not always forthcoming and causes problems, particularly if discrepancies or losses are not identified due to a lack of communication from the client.
This issue generally arises due to inadequate reconciliation and control processes within the clients’ accounting systems, to which the CSP is not privy.
The best management of this is to ensure a contractual obligation on both sides to provide relevant data and confirmation. Where this is not possible, a ‘negative’ confirmation will provide an element of protection to the CSP.
For example, it may stipulate that unless advised otherwise, if no confirmation is received within a specific timeframe, the position reported by the CSP is assumed correct.
Including such a statement makes it challenging as the onus for promptly identifying such issues resides with the client.
Of course, given contractual obligations, enforcement of such a position can be difficult in the event of a significant loss. However, it does set a baseline in ensuring both parties are obligated to maintain a successful business relationship.
