The Fraud Examiner

Using Cash Control to Prevent and Detect Fraud

April 2012

By Elina Chu, J.D., CFE, CPA

A former Major League Baseball team payroll manager pleading guilty to embezzlement makes the news; so does the investigation of a political campaign treasurer embezzling millions, undetected, for a number of years. These revelations may be shocking, but they are not surprising.

Having control over a large amount of cash is tempting; knowing there is no oversight is inviting. These factors add up to a fraud-in-the-making. All it needs is a spark.

According Dr. Donald Cressey’s Fraud Triangle, the elements necessary for a fraud to occur are pressure, opportunity and rationalization. Faced with personal financial needs and wants, these individuals exploited the opportunity and rationalized their actions.

Such stories emphasize the importance of cash control and the function of oversight. In all business entities, cash is a high-risk asset and vulnerable to fraud. Having controls in place and ensuring employees comply with them is of top priority.


The Cash Processes 

To begin with, there must be robust processes in place for cash receipts and disbursements. All cash processes, manual or automated, must meet their objectives to (1) safeguard the asset and (2) prevent, deter, and detect errors and fraud. To achieve these objectives, the organization must ensure receipts and disbursements are appropriately directed and recorded.

Key Controls 

The key controls in cash processes are segregation of duties and independent verification.

Segregation of duties is a preventive and detective control. The division of responsibilities serves to cross-check the work of each function, thereby increasing the chance of detection, while reducing the chance of concealment without collusion. The custodial duties direct the actual asset flow and must be separated from the cash recording duties.

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