Research Korner: Internal Financial Control System

Effectiveness of Internal Control Over Cash in Government Ministry

Effectiveness of Internal Control Over Cash in Government Ministry   A government ministry or department that has internal control of its finances including  cash will operate and render public service more effectively than one which has none.   Internal controls are measures taken to monitor  the work of staff and ensure their following of rules and regulations in the course of their work. Effective internal controls must be comprehensive and functional, with provisions on the correct performance of tasks and reporting of problems.[1]   Cash is an important asset of an organization’s financial position and its sound management helps in avoiding theft or fraud in everyday operations.[2] Internal controls in cash management can be done through personnel policies or technological processes, as in the separation of duties of staff handling accounting and disbursement.[3]   To be effective, internal control or management of cash must provide the right amount of money in the right place and time to enable the government ministry to meet its obligations in the most cost-effective manner.[4] Effective cash management is characterized by the use of a treasury single account system (TSA) that pools all revenues on a daily basis to ensure cash availability for expenditures, by a clear definition of the coverage of the system and by realistic planning and projections for the ministry’s short-term cash and for its budget.[5]   Efficient internal control over cash in government ministries offer the following benefits: [6] It increases the certainty that payments are done on time and also reduces the risks of mismanagement or fraud in operations. It reduces idle cash held by ministries and payment authorities in transit . It helps develop a short-term securities market that is efficient.   Cash management focuses on cash flows and balances, although expenditure  and revenue aggregates are expressed in accrual terms in many countries. When there is a difference between cash requirements and budget approvals, problems may arise, and the risk is that cash will be drawn by spending authorities in advance of need, that in turn will undermine central control discipline. A separate cash flow monitoring system has to mitigate such risks.[7]   Effective cash control in ministries requires efficient banking and clearing systems and capable data transfer. This has to be integrated with efficient information management systems in the ministry and the analytical capabilities of its staff.[8]   Leadership in a ministry is crucial in internal control of cash. If management shows little concern, the staff is unlikely to be diligent.[9] People will follow rules if there is adequate surveillance and punishment, but rewarding good behavior is better than punishment, because it internalizes ethical behavior and avoids the resistance that accompany punishment.[10]   The benefits stemming from reduced expected losses in an internal control must exceed Its primary cost of personnel and a control that prevents loss is better than one that detects it early.[11]   Internal control should be integrated into a ministry’s normal operating structure where a focus on controls has been instilled in everybody, because this would result in better internal control of cash with minimum incremental cost.[12]   	   	 		 		 		 		 		[1] Marquis Codjia, “The 		Relationship Between Internal Controls and Cash Management”, eHow.com, 		5 August 2010. 		<http://www.ehow.com/facts_6816356_relationship-internal-controls-cash-management.html> 		[accessed 19 April 2011] 	 		 		 		 		 		[2] ibid 	 		 		 		 		 		[3] ibid 	 		 		 		 		 		[4] Ian Lienert, “Modernizing Cash 		Management”, Technical Notes and Manuals, <http://blog-pfm.imf.org/files/fad-technical-manual-3.pdf 		> [accessed 19 April 2011] 	 		 		 		 		 		[5] ibid 	 		 		 		 		 		[6] Mike Williams, “Government Cash 		Management Good – and Bad – Practice”, September 2004, 		<http://www.storkeyandco.com/Library/Cash_Management/williams_technote.pdf 		> [accessed 		 		19 April 2011] 	 		 		 		 		 		[7] ibid 	 		 		 		 		 		[8] ibid 	 		 		 		 		 		[9]Carol F.Brown, “Internal Control 		Concepts’, 24 January 1995 <http://www.shsu.edu/~aac_cwb/control1.htm> 		[accessed 20 April 2011] 	 		 		 		 		 		[10] ibid 	 		 		 		 		 		[11] ibid 	 		 		 		 		 		[12] ibid

Effectiveness of Internal Control Over Cash in Government Ministry

Effectiveness of Internal Control Over Cash in Government Ministry A government ministry or department that has internal control o...