Fall 2012 issue of Horizons

Cash Disbursements and Accounts Payable

In addition, the auditors’ consideration of the club’s internal control is not designed to identify all deficiencies in internal control. If the auditor identifies deficiencies, they are required to determine the level of the deficiencies and communicate them to management. Thus, if your club lacks an adequate segregation of duties, it is considered a deficiency and is communicated in a management letter as a deficiency, significant deficiency, or a material weakness. What Does It Mean? There are two types of control activities which ensure management’s directives regarding operation and financial reporting of the club are followed—preventative controls and compensating or detective controls. Just as the term implies, preventative controls are designed to “prevent” an event from occurring. If adequate staffing levels exist, preventative controls are more desirable because of their potential ability to catch a problem before it starts. Segregation of duties is considered a preventive control because it prevents an event from occurring rather than discovering the error after-the-fact. Ideally, there should be at least two individuals involved with every financial transaction before it occurs to ensure adequate review for accuracy and reduce the risk of impropriety. Absent an adequate segregation of duties, the control environment is compromised and compensating controls must be incorporated to ensure transactions are being monitored for accuracy and propriety. Compensating controls are less desirable then segregation of duties because they generally occur after the transaction is complete; however, in the club industry, compensating controls are many times the reality.

In many club accounting environments, the same employee is maintaining the vendor master file, processing invoices, printing checks and mailing the checks after they are signed. In some cases, the same employee even has check-signing authority. There are a multitude of things that can go wrong in this scenario, including creation of fictitious vendors which is one of the top five common frauds committed in business. Some compensating controls that help mitigate risks in the areas of cash disbursements and accounts payable include:

∙ Independent approval of new vendor entries

∙ Dual signature policy

∙ Independent receipt and review of the bank statement (or online activity)

∙ Independent review of bank reconciliations

∙ Independent review of vendor edit reports

∙ Password and/or call-back verification for wire transfers and line-of-credit draws

∙ Independent spot checks of petty cash and the related supporting documentation and reconciliation

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