How to control cash risks from imprest funds

Due to unprecedented times such as a global pandemic and geopolitical unrest, companies are relying on de facto petty cash accounts to help their employees.

In brief

• Imprest funds are accounts that are held to meet payments that would otherwise be very difficult to disburse through normalized payment procedures.
• There are two main classes of imprest funds: Evergreen Imprests and Fixed Imprests.
• Organizations should consider five areas of control when creating an imprest fund: custodial duties, reconciliations, Delegation of Authority, funding, and account closure.

Since early 2020, the worldwide business community has existed in a constant cycle of unprecedented times: a global pandemic, geopolitical unrest, 100-year climate events, and unforeseen market disruptors. Organizations are finding themselves relying on de facto petty cash accounts to assist their employees as they navigate having to relocate, caring for relatives or, in less extreme situations, conducting business remotely on an emergency basis under unique circumstances that require large sums of cash on hand.

These cash accounts are best labeled as imprest funds: accounts that are held to meet payments that would otherwise be very difficult to disburse through normalized payment procedures. What defines an account as an imprest is that the advance of funds is usually in smaller increments, the account is deemed to be either ongoing or for a fixed term, and cash must be replenished after use, maintaining a minimum fixed balance. There are two main classes of imprest funds: Evergreen Imprests and Fixed Imprests. Evergreen Imprests are accounts similar to petty cash that are held throughout the fiscal year and replenished when necessary after review/approval of receipts. The second type, which will be the focus of this article, is Fixed Imprests, which are created for a particular reason or payment class, with the expectation to retire the account by a date specified upon approval for creation.

With any cash account comes the risk of errors or fraud related to misappropriation, corruption and/or inaccurate financial statements. As such, organizations should consider five areas of control when creating an imprest fund: custodial duties, reconciliations, Delegation of Authority, funding, and account closure:

1. Custodial duties

 Imprest funds must be properly safeguarded by a custodian. The monies should be kept in a separate bank account, or a locked deposit box for smaller increments, and never commingled with any other business accounts or individual’s personal funds. Additionally, only the custodian, or designated representative in their absence, should have access to the bank account or the keys/combination to the safe that holds the funds. In the event that the account or safe is accessed, a log must be maintained verifying all activities.

2. Reconciliations

      Custodians should be required to maintain a log with a set cadence for reconciliation depending on the volume of activity and/or monetary value in the account. Any individuals who access the account for allowable disbursements must provide to the custodian in writing the rationale via an imprest payment request form that includes recipient information, the amount requested, what the funds will be used for, and any available supporting documentation. Receipts for expenditures should be provided to the custodian and ultimately approved by a centralized supervisor/department head following a traditional expense reimbursement procedure.

 3. Delegation of Authority

 All disbursement approvals must follow the organization’s standard Delegation of Authority matrix based on the volume of the request. Additionally, a nominating committee should be established to review requests for disbursement and document approval, as well as complete requests in line with the organization’s Delegation of Authority. Even if these approvals occur after the fact due to processing in emergency situations, the committee should still meet, review and approve/deny the disbursements. Any required corrective actions resulting from the review of requests should be documented, retained and followed up on at the earliest available time.

 4. Funding

Accounting for any possible overages or shortages should be noted and tracked by the custodian, and subsequently reviewed and approved by someone in a supervisorial role. To set expectations, what is deemed to be a “significant amount” should be agreed upon during the establishment of the account; in the event that the threshold is exceeded, documentation and a detailed explanation must be provided. Additionally, maximum allowable distributions, known as “terminal amounts,” should be set so that one individual does not exceed an approved amount decided in advance by the nominating committee and/or a delegation of authority designee.

 5. Account closure

In the event that it is determined that the fund is no longer necessary, the custodian should close the fund. All monies, a closure form and all receipts should be reviewed by Finance and Accounting to determine the appropriate account for deposit of the remaining funds.

Ernst & Young LLP can help organizations streamline and improve their internal control environments related to imprest fund implementations or reviews of existing funds by leveraging technology to obtain optimal risk coverage and harnessing disruptors as an upside risk. One of the many ways that we can assist in accomplishing this is through analyzing and addressing risks with our proprietary technology that performs a Risk and Controls Matrix (RACM) health check.

A special thanks to Elizabeth Logan and Lyndi Thibodeaux for contributing to this article.