Petty Cash Accounts
Situation
The departmental secretaries at Meomy University have petty cash funds to pay delivery charges, and to purchase emergency supplies. Some secretaries use the funds to make change for faculty or staff, as well as to operate the coffee fund. A new department has just been established and Blake Allen, the business officer, has been asked to establish the requisite petty cash fund with a $1,000 advance. Being new to the institution, Allen reviewed the general ledger but did not find a petty cash account. What should he do?
Response
The lack of a petty cash general ledger balance indicates that the institution's prior financial administration considered these funds to be part of cash or cash on deposit. If Allen is fortunate, the university has an established operations handbook or procedures manual that describes procedures and indicates who is entitled or authorized to administer imprest petty cash funds. No petty cash general ledger probably indicates that Allen must establish and implement a petty cash procedure. To properly account for these funds, a petty cash ledger should be established as quickly as possible. The internal auditors could be helpful in determining where the funds exist, current balances, outstanding reimbursements, and if the fund management had been appropriately maintained.
Allen might also consider reorganizing the petty cash procedures. Is there a need to maintain these funds? Would these funds be warranted if master accounts were established for those who deliver items to the campus? Or, would firms delivering to the campus accept an institutional credit card number in payment of services? By reducing or eliminating the amount of petty cash outstanding, additional funds should be available for the cash management investment program.
An audit of the funds would identify the current fraud exposure at the university. A study conducted by KPMG Peat Marwick consulting group found petty cash as one of the major areas of loss, following check fraud and inventory theft. About 10 percent of those participating in the study reported loss from poor petty cash controls.