Cash is King
Cash is King
The money in customer accounts follows a systematic, yet sometimes elaborate maze. Following the green paper trail is key!
Cash for actuaries must seem to be a fairly straightforward item. The following discusses procedures and processes that allow us to continue assuming that all is well with cash balances.
Stepping back a little, we must recognize that customers have entrusted financial services companies with their hard earned cash and they want–and should be provided–the confidence that their money will be handled properly. Companies can increase customer confidence by following the money through their organization to ensure that it is being processed in a timely and accurate manner.
Just think about it for a minute. With a 401k plan, for example, cash passes through treasury, premium collection, operations and investment departments before finally being booked by accounting. Any unbalanced amounts between operations/finance must act as an early warning system and set off alarm bells throughout the organization.
Within this article, we are not specifically referring to implementing new Sarbanes-Oxley (SOX) procedures or internal audit checks: we are however suggesting procedures that make sound business sense and are fundamental in order to ensure:
- client accounts are being correctly credited/premiums are being booked–thus ensuring that mathematical reserves are correct,
- operations are functioning as they were designed to and therefore confirming the accuracy of the operational feeds that go to actuarial and accounting,
- reduced operational risk within an Enterprise Risk Management study.
We have established a check list of 10 items that will ensure a smooth and controlled environment. The underlying thread within these items is the importance of one key concept-that cash is king.
- Is incoming and outgoing cash reconciled daily?
A daily cash reconciliation process should be performed to ensure that all cash receipts and disbursements are accounted for accurately. This reconciliation is normally done by the treasury or banking area of a company. It is also critical that the correct cash in and cash out balances are reconciled with the various areas of the organization that also use this cash information, such as operations and accounting. Of crucial importance is that this three-way balancing of cash information is performed between the treasury, operations and accounting to reduce the risk of customer money not being identified, processed or accounted for correctly. A key control to enhance this process is to ensure that bank reconciliations are performed timely and accurately.
- Is there strong management oversight?
It is essential to have strong management oversight of the various reconciliation processes relating to cash. Managers should be reviewing the daily reconciliations to ensure they are done on a timely and accurate basis. One way to ensure that this step is completed is to introduce a mandate indicating that summarized cash and suspense reconciliation reports be distributed to upper management on a monthly basis. Another key control is to ensure that proper authorization and approval procedures are in place, specifically as they relate to cash distributions.
- Are we in compliance with regulatory guidelines?
Regulatory agencies usually have strict rules relating to the handling of cash, including anti–money laundering rules. Significant fines from governmental agencies may be assessed for non-compliance with published regulations.
- Do we have complete and accurate cash suspense detail records?
Having the proper reports is really the lynchpin of financial integrity. Having cash suspense detail records such as current aging reports is essential. In addition, outstanding items need to be cleared in a timely manner to ensure that customer money is processed correctly. A key goal would be to ensure that all outstanding suspense items be reviewed in a timely manner and that there should be no items outstanding greater than 30 days. In addition, it would be wise to create a suspense log that would track the various reasons why items were in suspense and how they were resolved. The information provided by this suspense log would help to identify employee training issues or possible procedure control weaknesses.
- Are the cash suspense detail records balanced to the general ledger cash suspense account on a monthly basis?
This is extremely important. A company must have monthly general ledger reconciliations that will allow reconciliation of the general ledger accounts to the operations suspense detail records. A formal general ledger reconciliation will enhance the financial integrity of a company's financial statements. As part of these general ledger reconciliations, differences will be identified and should be cleared in a timely manner. This process also ensures that the operations suspense detail records are accurate and include all the necessary information for the operations area to verify that customers' cash has been applied properly.
- Have we identified any risks of committing fraud?
It is crucial to identify and mitigate any risk of committing fraud relating to the processing of financial transactions. Ways of mitigating fraud include passwords for accessing systems, segregation of duties, authorization and approval processes and physical controls such as locking undeposited checks in a safe. In addition, externally initiated fraud can be mitigated, for example, through proper client identification procedures. A key control is the development of a complaint log to review and monitor all customer complaints. Using this log is a good tool to identify possible fraud issues and training opportunities as well.
- Are bank reconciliations current and any outstanding items identified and cleared in a timely manner?
Bank reconciliations should be kept current and any reconciling items should be cleared in a timely manner. This reduces the risk of the company having unrecorded cash or unrecorded expenses on the financial statements. Bank reconciliations are also a key control relating to the balancing of cash in and cash out.
- Are employees handling cash properly trained?
Employees who work with cash need to be well trained in the proper handling of monetary transactions to minimize the risk of committing financial errors. It would be a wise move on a company's part to establish a back up plan for each cash function in the event that the regular employee assigned to that particular function is not available. Another important control is to make sure that there is a proper segregation of duties relating to the processing of cash. For example, an individual who maintains and reconciles accounting records should not be able to obtain custody of checks.
- Do we perform periodic reviews of existing controls?
Many companies will establish controls but don't necessarily review and test them periodically to ensure that they are adequate and working properly. If they are not reviewed periodically, an environment that challenges the integrity of the processing standards is created, such as was the case with Enron. It is important to have a strong internal control structure, emphasizing controls that are preventive (segregation of duties), detective (bank reconciliations) and monitoring (quality reviews). In the United States, this would include conforming to Sarbanes-Oxley guidelines, which include the periodic testing of all key controls. It is also important to ensure that any automated systems used for cash processing have the proper system controls and edits in place.
- Is customer correspondence handled in a timely and accurate manner?
Any time a customer makes a request for information, the company should respond in a timely and accurate fashion. When the information is related to cash, such as financial transaction confirmation statements and quarterly account statements, the stakes become much higher and provides a critical point for the company to develop a stronger relationship with the customer. In turn, prompt attention to monetary transactions strengthens the confidence the customer has in the company, which helps to establish a long and healthy relationship between the two.
Answering these questions positively will help the company operate in a better controlled, financially sound environment. An analysis should be done to determine the answers to these questions. Doing so will help to identify shortcomings in the organization and create recommendations to enhance financial integrity, ensuring customers that their cash is king!
Leanne Abild is senior business consultant at Hartford Life International. She can be reached at Leanne.Abild@hartfordlife.com
Nick Tracanna is director, international customer service and operations finance at Hartford Life International. He can be reached at Nicholas.Tracanna@hartfordlife.com
Ronald Poon-Affat FSA, is CFO at Icatu-Hartford Insurance (Brazil). He can be reached at firstname.lastname@example.org