Cash Overview

Review the below standard for guidance surrounding custodial funds at Indiana University.

The Office of the University Controller is in the process of converting Standard Operating Procedures (SOPs) into IU accounting standards. This portion of the book will expand to include standards focused on cash and proper cash handling at Indiana University. This will include topics such as cash reconciliation, reporting cash transactions, managing cash deposits, and safeguarding currency. The standards within this book will equip readers with the knowledge needed to effectively navigate the complexities of cash and custodial fund accounting, ensuring accurate financial reporting and maintaining trust with stakeholders. Please continue to check back as SOPs are converted into standards within this book.

UCO-AST-1.01: Custodial Funds

Prerequisites

Prior to reading the standard on Custodial Funds, it is beneficial to review the below items to gain foundational information:

1. FIN-ACC-30 Fiscal Misconduct
2. FIN-ACC-35 Fraud
3. FIN-TRE-120 Processing Revenue
4. FIN-ACC-470 Internal Controls
5. FIN-ACC-560 Custodial Funds

Preface

This standard provides a definition of custodial funds and outlines custodial funds procedures, including the creation, operation, closing, and reconciliation of a fund. There is also important information regarding fund shortages, fraud, fund modifications, use of bank accounts, and stale checks related to a custodial fund.

Introduction

What is a Custodial Fund?

Custodial funds are separate funds set up by a Custodial Funds Coordinator at the request of a department. A custodial fund may be established when university funds are needed but normal financial procedures, such as a purchase order or Purchasing Card, cannot meet the needs of the specific situation.

Types of Custodial Funds

Two types of custodial funds are utilized at Indiana University:

1. Change Fund: Established for the sole purpose of making changes for customers. The authorized amount should not exceed what is needed to support required cash drawers.
2. Revolving Fund: Cash advances to a custodian for use in the operation of a contract, grant, study program, or similar endeavor. The project must be one that due to geographical separation or other acceptable reasons cannot use normal university procedures for payments. The authorized amount should never exceed two months’ worth of transactions. Revolving funds may be used to pay research participants and human subjects, but the custodian must obtain permission to do so from Human Subjects/IRB Compliance Services before the fund is created.

Who Can Act as a Custodian?

Only certain individuals within the university can act as custodians of a custodial fund. Policy FIN-ACC-560 Custodial Funds states that, “A custodian must be an employee of the university who is a faculty member, unit head, fiscal officer, or business manager. The custodian must accept personal responsibility for the safety, proper usage, and return of the funds entrusted. The actual handling of the fund may be delegated in some cases, but responsibility for the fund remains with the custodian.”

A custodian must be a full-time university employee. The responsibility of the custodial fund remains with the custodian even if activities related to the fund are delegated (e.g. delegation of cash handling to a graduate student).

Importance and Impact of Custodial Funds

The proper handling of custodial funds is important due to the unique internal control risks related to the issuance of custodial funds. Custodial funds are primarily composed of cash, so they require additional considerations and controls to prevent fraud and misuse. Additionally, there are legal and tax implications for some custodial funds, creating additional risk if rules and procedures are not followed.

Potential Impacts and Consequences for Misusing Custodial Funds

• Failing to exercise proper cash controls including failure to submit timely reconciliations may result in inaccurate accounting, audit findings, shortages, or fraud.
• Failing to report taxable payments or paying salaries or wages to individuals on custodial funds without approval could result in legal or tax consequences for Indiana University.
• Failure to follow these standards and/or respond timely to audit requests will result in termination of the custodial fund and/or disciplinary actions up to and including termination from the university.
• Failure to pursue a professional services agreement when paying payees over applicable thresholds may result in legal and/or tax consequences for Indiana University.

Custodial Funds Discussed in Detail

Expectations for Custodians and Unallowable Expenses for a Custodial Fund

Understanding the responsibilities of a custodian for a custodial fund is crucial before establishing the fund itself, as this understanding helps ensure proper management and compliance from the outset. This includes regularly completing a revalidation of the fund, responding promptly to requests from auditors, and ensuring the custodial fund adheres to the applicable regulatory and internal requirements. Additionally, custodians must be aware of the types of expense that are non-permissible for this type of fund to avoid mismanagement or violations. By fulfilling these duties, custodians not only maintain the integrity of the fund but also contribute to the transparency, accountability, and trust in the management of financial resources.

The custodian is primarily responsible for ensuring compliance with the requirements for a custodial fund including the operation and management of custodial funds but can delegate fund handling responsibilities to the fiscal officer and other staff members of their choosing.

It is recommended that each custodial fund creates and maintains accurate process documentation. By maintaining up-to-date and detailed process documentation, custodians can improve operational efficiency and help ensure that all actions are in alignment with IU policies and best practices. Well documented processes help to clarify roles and responsibilities and reduce the risk of errors or fraud.

Custodial Funds Coordinators conduct an annual audit of all active custodial funds via the Custodial Fund Revalidation form. The form requires the custodian and fiscal officer to confirm the status, management, control procedures, and continued need of the fund for the calendar year. It also reaffirms IU policies and procedures related to custodial fund operation and management. It is the responsibility of the custodian and fiscal officer to accurately complete this form and return the form to the appropriate Custodial Funds Coordinator promptly each fiscal year.

Additional audit procedures or questions about the custodial fund may be made by direct request from a Custodial Funds Coordinator, the Internal Audit department, and external auditors. Custodians must promptly make the requested information for audits available upon request.

Prior to establishing a custodial fund, it is important to understand that there are certain expenses that are non-permissible. Custodial funds are prohibited from utilizing funds for the following purposes:

• Frequent purchases from the same vendor, which can be handled through purchase orders
• Hospitality
• Payments to individuals for wages (unless pre-approved by the appropriate university administration offices via the Custodial Funds Coordinator)
• Personal cash advances
• Cashing personal checks

Establishing a Fund

Please review the Procedures for Establishing, Operating, Reconciling, Modifying, and Closing a Custodial Fund document for detailed information on how to properly establish a custodial fund. In general, a department should make a request for a new custodial fund at least two weeks prior to the date when the funds are needed. Please allow an additional week of lead time if the custodial fund is needed to complete any of the following processes:

• Pay more than $5,000 to a foreign individual or entity over the life of the fund
• Pay more than $10,000 to a domestic individual or entity over the life of the fund
• Pay any individual or entity more than $400 per year

Be advised that processing payment for payees that were not originally communicated to a Custodial Funds Coordinator when the fund was established may result in the need for additional permissions. Examples of such situations include:

• Making any payments exceeding $400 to (1) any individual or organization performing services in the United States or (2) any participant in a program being held in the United States.
• Making any payments of $5,000 or more (either a single payment or over the life of the custodial fund) to any foreign individual or entity.
• Making any payments of $10,000 or more (either a single payment or over the life of the custodial fund) to domestic individuals and entity.
• Using custodial funds to pay salaries or wages to any individual.

These situations will require additional permissions from Indiana University’s tax, legal, and purchasing departments. If any of these situations arise, contact a Custodial Funds Coordinator for guidance on obtaining applicable permissions.

Operating a Fund

The operating procedures of a custodial fund vary slightly depending upon the fund’s purpose. Please review the Procedures for Establishing, Operating, Reconciling, Modifying, and Closing a Custodial Fund document for an outline of the general procedures surrounding the operation of a custodial fund.

Safeguarding a Fund

Custodial fund cash must be properly safeguarded per FIN-TRE-120 Processing Revenue. The method used to secure the funds should be appropriate for the amount. The existence and location of the cash should be on a need-to-know basis and should not be communicated to unrelated parties. Additionally, custodial funds may be subject to surprise counts and/or physical inspection by Internal Audit.

Reconciling a Fund

The custodial fund reconciliation process is a requirement for all custodial funds. Regularly reconciling custodial funds helps ensure financial reporting is accurate, detect potentially fraudulent activity, and maintains transparency by identifying any discrepancies related to cash transactions. While the Custodial Funds Coordinator is responsible for reviewing the reconciliations, the custodian retains ultimate responsibility for ensuring the accuracy and completeness of the reconciliation process. For detailed, step-by-step procedures on the reconciliation process, please refer to the Procedures for Establishing, Operating, Reconciling, Modifying, and Closing a Custodial Fund document.

Information for a Fund with a Bank Account

In certain circumstances, a revolving fund may require its own checking account to properly operate. Please refer to the Procedures for Establishing, Operating, Reconciling, Modifying, and Closing a Custodial Fund document for the additional procedures that must be followed by a custodial fund with a bank account.

Modifying a Fund

There are several reasons a custodial fund may need to be modified. It is the responsibility of the custodian or fiscal officer to report significant changes to a custodial fund. Below is a list of examples that would necessitate a fund modification:

• Change of custodian
  •  Any staff changes that will impact the custodial fund require notification to the Custodial Funds Coordinators, particularly when there is a change of custodian. This is urgent to ensure that the custodial fund responsibilities are properly transferred to the new custodian.

• Request for an increase in funds
  •  When a custodial fund is initially established, it is assigned an authorized balance based on the custodian’s request and the agreement made with the Custodial Funds Coordinator. That balance is the maximum amount of funds that the custodial fund is allowed to retain. Requests for amounts exceeding the authorized balance are prohibited and must be processed through a fund modification.

• Change in the expense account number
• Change in the purpose of the fund
• Closing or decreasing a fund
• Change in contact, phone, or email of any employee related to the fund
• Change in the BUY.IU supplier profile
  • If a change needs to be made to the BUY.IU supplier profile for a custodial fund, the department should not initiate a BUY.IU Supplier Edit Request form. Changes to the BUY.IU supplier profile can only be made by a Custodial Funds Coordinator.

• Expense account expiration
  • If an expense account associated with a custodial fund expires, the fund must either be assigned to a new expense account or closed. The Custodial Funds Coordinators should be notified of this change via the custodian or fiscal officer completing a Custodial Fund Modification form.

Please review the Procedures for Establishing, Operating, Reconciling, Modifying, and Closing a Custodial Fund document for guidance on how to report changes to a custodial fund.

Closing a Fund

Custodial funds should be closed when they are no longer needed. It is the responsibility of the custodian to initiate fund closure promptly after the custodial fund is finished with its purpose.

Please review the Procedures for Establishing, Operating, Reconciling, Modifying, and Closing a Custodial Fund document for instructions on how to properly close a custodial fund.

Best Practices

1. Confirm the timing of the custodial fund reconciliation is accurate prior to submitting the Custodial Fund Reconciliation form.
2. For custodial funds that utilize currency, conduct daily cash counts. Ensure that a witness is present during the count.
3. Create and maintain comprehensive process documentation for the custodial fund to ensure accuracy and accountability.
4. Notify the appropriate Custodial Funds Coordinator promptly of any staff changes that will affect custodial fund responsibilities. A change of custodian is particularly urgent and requires immediate notification to ensure custodian duties are transferred.
5. If a custodial fund account expires, complete a Custodial Fund Modification form, as the fund must be assigned to a new expense account or properly closed.