Hollis & Reeve: one pair of hands on the whole payment cycle
Hollis & Reeve is a surveying practice with two partners and five staff. Dan Miles, the office manager, opens the post, records supplier invoices, prepares every BACS and cheque payment, holds the £300 petty cash float and reconciles the bank statement each month. The partners sign cheques only when Dan places a batch of ten or more in front of them at month end, without purchase orders or delivery notes attached. Last month a supplier telephoned to say a £1,240 invoice was still unpaid nine weeks after issue; the payment run shows it was settled twice, once by BACS and once by cheque. The bank statement also shows a £75 monthly standing order to a payee the partners do not recognise. Dan says he is 'too busy to keep chasing paperwork'.
1. Identify three control weaknesses in this payment system and, for each, state the specific risk it creates.
Read the worked answer
Weakness 1 - one person both records invoices and prepares payments. Risk: Dan can create or alter a supplier record and pay it, and the duplicate £1,240 payment shows that the second payment went out with no independent check that the invoice had already been settled.
Weakness 2 - Dan reconciles the bank statement he himself has generated entries for. Risk: the reconciliation cannot detect his own errors or fraud. The £75 standing order to an unknown payee has sat unexplained precisely because the reconciler has no incentive to raise it.
Weakness 3 - partners authorise in batches with no supporting documents. Risk: authorisation is a rubber stamp. Signing ten cheques at once without invoice/PO/delivery note means no one verifies the amount, the payee or whether the goods were received.
Weakness 4 (also acceptable) - Dan holds and records the petty cash float. Risk: cash can be removed and concealed by false vouchers or an IOU, with no independent count.
For full marks, each weakness must be paired with a named consequence, not just 'error or fraud'.
2. The practice cannot afford more staff. Recommend how duties should be reallocated among the five existing employees and the two partners, so that no single person controls a transaction from start to finish.
Read the worked answer
The principle is to split custody, recording and authorisation so that two people are needed to complete and conceal a payment.
| Stage | Who | Why |
|---|---|---|
| Open post and list remittances | Receptionist, not Dan | Removes Dan's chance to suppress a supplier statement or a complaint |
| Enter supplier invoices | Second clerk, matching invoice to PO and delivery note | Dan no longer creates the liability he later pays |
| Prepare payment run | Dan (keeps his expertise) | Preparation is not authorisation |
| Authorise payment | A partner, against the invoice, PO, delivery note and a printed BACS listing | Independent check before money leaves |
| Bank reconciliation | Second clerk, reviewed and signed by a partner who does not authorise payments | The reconciler has nothing to hide |
| Petty cash | Receptionist holds the float; partner counts it monthly, unannounced | Independent custody and check |
Also: reissue a unique payment reference per invoice and reconcile supplier statements monthly, which is the control that would have caught the double payment of £1,240.
3. Recommend the most appropriate payment method for each of the following and justify your choice: (a) £24,000 to a solicitor that must clear today to complete a property purchase; (b) rent of £1,450 a month, fixed for three years; (c) quarterly electricity bills of a varying amount.
Read the worked answer
(a) CHAPS (same-day sterling transfer). The money must be irrevocable and settled today. A CHAPS payment gives same-day, high-value certainty; a BACS payment runs on a three-day cycle and a cheque is worse still. The fee is trivial against a £24,000 completion.
(b) Standing order. The amount and date are fixed, so the practice can instruct its own bank to pay £1,450 on the same date each month and nothing further is needed. A direct debit is less suitable because the payer does not control the amount.
(c) Direct debit. The amount varies each quarter, so a standing order would need constant amendment. Under a direct debit the supplier collects and the practice keeps the protection of the Direct Debit Guarantee - advance notice of the amount and a right to a refund of any error. A standing order here would risk under- or overpaying.
Judgement marks come from tying the method to the variability of the amount and who initiates the payment, not from listing methods.