Don’t Let Them See You Coming

My first job as an accounting graduate out of Notre Dame was with Peat, Marwick, Mitchell & Co, CPAs, one of the “Big 8” accounting firms. The firm and our local Indianapolis office audited a number of banks, small to large. One of the standard audit procedures was to perform a surprise cash count of the branches and home office on the same day. That entailed showing up early morning, before the branches opened, with written authorization typically from the CFO or controller that we presented to the branch manager. Then we would count the teller cash drawers and the vault, compare with the prior days cash closing sheets and assuming all was well, which it typically was, we would release the branch to open for the day’s business.

We called them “surprise” counts because the tellers and branch managers were not supposed to know when we were coming or in theory they would be extra careful with their closings that day. But, they generally had a pretty good idea around the time of the year we would show up.

One client bank, in a small rural town in southern Indiana, was scheduled by us for the surprise cash count in early fall. We had a staff of 8 people to cover the branches and the home office. We loaded up in our cars to drive to the town the evening before, so that we could show up early the following morning, do our surprise cash count audits, and head home.

As we pulled in to the parking lot at one of the two motels in town, imagine our surprise when, there on the neon sign, just below the motel name, it blazed out “Welcome Peat Marwick”. You see, the secretary had confirmed the motel reservations in the Firm’s name, not in the name of an individual, and given that we were taking 8 rooms, in a small town, with only two motels, we were big customers. So, we were loudly welcomed and announced to the town. When we showed up at the branches the next morning, the managers had a pretty good laugh at our expense. Everyone knew we were coming. The cash counts were perfect (they usually were).

The point is that if you are going to surprise examine books and accounting records, it must be a surprise, or there is no purpose. It does not always have to involve the outside auditors. Good internal auditors, controllers, CFOs, and the like are continually “auditing” the numbers they get from the business departments in their companies. They always have a skeptical approach, they investigate different areas and departments, and they begin their work unannounced.

In my CFO role for my clients, I examine different sets of numbers “unannounced” periodically. One month it might be a review of the inventory systems, another the receivable collection efforts, another the purchasing departments. Most clients have very good internal accounting systems and each component need not be investigated every month. But, random and surprise analyses go a long way towards making sure the accounting and financial systems are and remain accurate, so the numbers produced are worthwhile for management to use in cash flow analysis and planning. The fact that someone is going to take a look, periodically, unannounced, causes the staff to stay alert and do good work, all the time. Ronald Reagan said, in reference to our Russian “ally” at the time, as we were negotiating reductions in nuclear warheads: “Trust But Verify”. Same thing goes for financial information.

By the way, the next year, we gave up even trying to get motel rooms in that small town. We stayed in a nearby city, and booked the rooms on our personal credit cards, in a couple of different hotels. The surprise worked, but no surprise to us, the cash counts were still clean. They were a well run bank and a good client.