Accounting basics 1: How to protect your petty cash

Senior accountant Jonathan Lachmann says more charities are discovering inappropriate use of office reserves by their own staff

Jonathan Lachmann
Jonathan Lachmann

Like most sectors in this age of austerity, the third sector is feeling the pinch. It's not just a metaphorical pinch, either. 

In the first six months of the year, we have encountered a far greater number of charities that have discovered a member of staff is helping themselves to the petty cash. If the figure has not doubled, then it is not far from having done so. Times are tough, living costs are high and it's only inevitable that some people will take extreme action to make ends meet.

In many cases, when people start to make inappropriate use of petty cash it is initially to use it as a form of payday loan — minus the four-digit APR. A small amount is taken and is replaced once the employee has been paid.

In our experience, however, as the employee does it more regularly and gets away with it, only part of the money will be replaced. Eventually, none of it will be returned.

Big fraud generally starts as very small fraud. With the cash many charities have sitting around all the time, it's something to which they are especially vulnerable.

So how can charities protect themselves against this type of fraud?

  • First and foremost, charities need to ensure that tight controls are in place around the petty cash system to keep risks to a minimum. We tend to advise charities to use the imprest system, which maintains a minimum cash balance and is far easier to reconcile. The imprest system is transparent and easy to manage.
  • If possible - and this will depend on the size of the charity - we also suggest a segregation of duties between those authorising the petty cash and those reconciling it — as well as random spot checks by different senior managers.

These may seem like obvious suggestions but we find that charities can be too trusting, and often don't have robust practices in place.

In summary, the more checks and balances you have in place, the less likely it is that your petty cash will be used for the wrong purposes, which can result in a major breakdown of trust throughout the charity.

Charities will always be susceptible to minor irregularities, but the key is to have systems in place that minimise the chances of anything more serious occurring.

This is the first of a short fortnightly series about basic accounting practices for smaller charities

Jonathan Lachmann is a senior manager at HW Fisher & Company

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