Chapter 3

Cash—Management and
Fraud Prevention

CACF 450 – N. Kirsh, CPA, MBA, CBV

Adapted from Working Capital Management: Applications and Cases, James S. Sagner
(Copyright ©2014 by John Wiley & Sons, Inc. All rights reserved.)
Learning Objectives
 Understanding the significant components of
cash
 Appreciation of the bank products useful in

managing paper and electronic forms of cash

 Determination of how to reduce float and

processing costs associated with cash

 Consideration of various techniques of managing

the risk of theft and fraud affecting cash

Forms of Cash

 Cash includes any generally accepted form of

payment, including coin and currency, checks, and
the electronic mechanisms of Fedwire and ACH
◦ Bank cash, or cash in the process of collection or
disbursement (referred to as float in Chapter 1)
◦ Cash to which access has been arranged through a bank
line of credit, accessible whenever a shortfall of cash from
operations is forecast
◦ Cash invested in short-term investments in order to earn
a return but that can be quickly turned into actual cash
through the liquidation (sale) of the asset
Cash Management
 Reactive: long-established routines allowed to
continue, ignoring appropriate practices
◦ Handling cash in such a manner leading to theft,
embezzlement, and/or employee injury
◦ See examples in the text
Actual Situation I. – In Class WIR
 A company received checks in the mail, created a
deposit ticket, and had one of the older female
employees walk the deposit to the bank on her way to
lunch. The bank was located in an office plaza
adjacent to the company’s offices. This activity
occurred every day at about the same time, so
passersby could watch her on her journey.
 One of these observers realized that the woman was
fairly defenseless, so he grabbed her bag containing
the deposit, knocking her down and injuring her in
the process, and easily got away. The deposit,
including checks and some cash, was never recovered.
Actual Situation II. – In Class WIR
 Checks for monthly retail services were sent to a company
whose name included the word “the” (as in “The Wiley Group”).
The checks were received in the mailroom, where clerks opened
all mail and directed it to the appropriate area of the
organization. Any checks were supposed to be sent to the
finance group for copying and deposit. One of the mailroom
clerks noticed that some company names in the “pay to the
order of ” line left quite a bit of space between the words “the”
and the company’s name.
 When that occurred, the clerk inserted an “O” or an “A” in
matching ink to change the recipient’s name to Theo or Thea,
then stole the check and deposited it in a bank account he had
opened in that name (as in Theo Wiley Group). Months passed
before customers realized that they had never received credit for
their payments and notified the company.
Actual Situation III. – In Class WIR
 An insurance company issued a check for $70 to
settle a claim for property damaged by its
policyholder in an auto accident. The check was
altered to $7,000 using inexpensive desktop
technology and then cashed. Three months
passed before the fraud was discovered, and by
that time the check recipient had disappeared
B2B Payments
 There are five main ways to send and receive B2B payments:

 Checks – This category includes traditional paper checks and electronic checks
issued by a buyer to a seller. When the check is deposited, the seller’s bank will
request payment from the buyer’s bank.
 Wire transfers – These are funds transfers between banks that are routed through a
financial network like SWIFT. Wire transfers usually deliver money within hours.
Significantly more expensive than other options
 Electronic bank transfers – These are payments between banks that are routed
through the Automated Clearing House (ACH)/ Automated Clearing Settlement
System (ACSS) in Canada. This is one of the safest and reliable payment systems, but
bank transfers take a few days longer than wire transfers.
 Credit cards (including one-time use virtual credit cards) – Credit cards allow the
seller to receive payment quickly, but the buyer can defer payment for one or more
billing cycles.
 Payment gateway – A payment gateway is an online payment platform that allows the
buyer to pay for goods or services online during the checkout process
◦ Square, PayPal, etc.
B2B Payments
Lockboxing Concept
 18 billion checks written in the United States—most
other countries primarily use electronic payments
 Due to long-time restrictions on national banking
(repealed in the 1990s)
◦ Until 2004, required checks be physically returned to drawee
bank for clearing
 Lockbox avoids a company’s receiving and processing
checks for collections against receivables
◦ More efficient, less expensive
◦ Greatly reduces potential for theft as all activities under bank
supervision
◦ Faster access to funds
Lockboxing Mechanics
 Customers mail remittances to a bank-controlled post office box
in major cities
 Bank picks up mail numerous times each day beginning in the
early morning
 Mail is delivered to the bank’s processing site
 Lockbox area opens the mail and pulls checks and remittance
advices
 Lockbox determines whether any check should not be depos­ited
based on instructions from the company
 A copy or image of each check is created
 Acceptable checks are encoded and deposited
 Availability is assigned, showing how rapidly the checks will be
considered as collected funds based on the drawee bank;
summary information is sent to the company about the
remittances
Types of Lockbox Processing
 Wholesale lockbox handles low-vol­ume, high-dollar checks
◦ Critical data fields are manually key-entered from the remittance
document such as the customer and/or invoice number
 Retail lockbox is based on automated processing of scanlines
(known as magnetic character ink recognition or MICR-lines)
of documents
◦ Used primarily for consumer payments
 Imaging permits the digitized scanning, sorting, cataloging,
and retrieval of paper docu­ments, including checks,
remittances, envelopes, and correspondence
How Does Lockboxing Reduce Float?

 No late delivery of mail to suburban locations

 Elimination of mail holdover due to internal processing steps
 Checks depositing in cities, not at suburban banks
 Check clearing through expedited availability

◦ Based on a bank’s recent experience in clearing the checks it receives

 Savings of up to one-half of current total collection time,
which can be six or more days
 Cost: about $1 per transaction for wholesale lockbox and 25

cents for retail lockbox

Depository Accounts
 Many companies continue to use regular depository accounts (demand
deposit accounts [DDAs]) for any checks received in their offices
◦ This practice is inefficient (due to float considerations) and potentially risky (due
to the possibility of theft and fraud)
 Access control: regular bank accounts are difficult to monitor, as
companies often allow several authorized check signers to disburse
deposited funds
◦ Bank accounts are frequently opened at each facility of an organization for the
convenience of staff, check encashment (cashing employee checks), or other
reasons
◦ Large companies with widely separated operations may receive requests to have
access to local banks, and if funds are collected by a branch office, may simply
open a local account, deposit these receipts, and disperse the funds for local
expenses
Controlled Disbursement Concepts
 Accounts are located at large bank suburban or country locations
specifically for the purpose of receiving the presentment of a
cash letter once or twice daily in the early morning hours
◦ Banks notify its corporate customers by mid-morning of that day’s check
clearing (or debit) against the account
◦ Customers then fund the debit once daily, eliminating the need to leave
balances awaiting possible later clearings
◦ Controlled disbursement costs about 15 cents per item
 Related features
◦ Full or partial reconciliation to know outstanding checks and other
exceptions
◦ Positive pay
Positive Pay
 Requires that a file be sent to the bank containing the number
and amount of each check issued that day
 As the issued checks clear, the bank matches the number and

amount to the check issued file

◦ If any mismatches occur to either factor, the bank asks the company
for accept/reject decisions
◦ The daily files of issued check information can be accumulated by the
bank into a file for monthly account reconciliation purposes
◦ Honoring any fraudulent check is prevented, such as those resulting
from alteration or counterfeiting
Positive Pay

New
Check checks are
Assign Bad checks Company Bad checks
data sent verified
check data sorted notified returned
to bank against
data
Electronic Transactions
 Federal wire transfer (Fedwire) is processed on a same-day
basis without settle­ment risk to the participant, as the Federal
Reserve System guarantees payment
 Important characteristics:

◦ Speed: very fast, although a few hours delay may occur at peak
operating times
◦ Cost: expensive to use relative to other payment types; at about $15 at
each end of the transaction to $30 or more, Fedwire is 200 times the
cost of ACH
ACH/ ACSS (Automated Clearinghouse)
 Inexpensive settlement of low-value, high-volume, and repetitive payments
on an electronic, batch, overnight basis
◦ Credit transactions are used for direct deposit of payroll, and pension and annuity
payments
◦ Debit transac­tions, also known as direct debits, are used for consumer bill payments,
such as utility bills, phone bills, and insur­ance premiums
 Total number of ACH transactions is now about 22 billion a year, slightly
more than the number of checks written
 Important characteristics:
◦ Value: payments can be made on precise settlement dates
◦ Reliability and efficiency: compared with checks, ACH collections follow a more
predictable pattern
◦ Electronic processing and interfaces: ACH allows for auto­mated interfaces to
reconciliation and cash application systems
◦ Cost: about 15 cents per transaction
Why Do Frauds Still Occur?

 Companies assume they are too small but are very susceptible
to fraud
◦ Largely due to failure to separate clerical duties
 “Our bank doesn’t have these products.”
◦ Talk to another bank
 “Our auditors never told us.”
◦ Auditors often do not understand cash issues
 “These are our longtime, trusted employees!”
Cash Management
 Essential cash management elements
◦ Float
◦ Processing expenses Microsoft Excel
◦ See example at end of Chapter 3 Worksheet
 Base case
 1st and 2nd scenarios
 See prepared Excel
 Bank products can proactively assist in developing
more efficient practices