Financial services companies often have significant cash activity that does not represent operating revenue or expense. Client funds, regulated balances, investment accounts, and settlement activity must be mapped based on their economic purpose to avoid misleading Proof of Cash reconciling items.
1. Operating Cash vs. Customer and Regulated Funds
Not every cash account should be treated the same.
Operating Cash
Common examples include:
- Operating checking accounts
- Payroll accounts
- Disbursement accounts
- Collection or deposit accounts
Recommended Audit Sight mapping:
Cash > Bank Account
These accounts should also be tagged as bank accounts so they can be mapped to the corresponding bank statements.
Customer and Regulated Funds
Common examples include:
- Client trust accounts
- Escrow accounts
- Custodial accounts
- Broker-dealer reserve accounts
- Money market funds
- Operating sweep accounts
Recommended Audit Sight mapping:
Cash > Bank Account or Cash > Deposits and Investments
The appropriate mapping depends on whether the account functions as an operating bank account or as customer, regulated, or investment cash.
Why This Matters
These balances may involve substantial cash movement without representing company revenue or expense. Incorrect mapping can create large reconciling items even when the accounting records are correct.
2. Broker-Dealer Settlement Activity
Broker-dealers commonly receive customer cash and remit most of it to a clearing broker. The company retains only its commission.
Example
A customer purchases $1,000,000 of securities.
The bank reflects:
- $1,000,000 received from the customer
- $998,000 paid to the clearing broker
- $2,000 retained as commission
There is nearly $2 million of gross cash movement, but the broker earns only $2,000.
The GL may present the transaction either gross or net.
Gross presentation
- Revenue: $1,000,000
- Clearing expense: $998,000
- Net income: $2,000
Net presentation
- Commission revenue: $2,000
Proof of Cash Impact
When the bank is gross but the books are net:
- Cash inflows appear substantially higher than revenue
- Cash outflows include customer settlement activity that is not an operating expense
- Large reconciling items may appear despite correct accounting
The objective is to identify the activity as pass-through customer funds—not missing revenue or expenses.
3. Customer and Custodial Liabilities
Financial services companies may hold cash on behalf of customers, investors, merchants, or policyholders.
Common account labels include:
- Customer Deposits
- Client Funds Liability
- Escrow Payable
- Funds Due to Customers
- Funds Due to Merchants
- Premiums Payable to Carriers
Example
A payment processor receives $10 million, remits $9.7 million to merchants, and retains $300,000 in processing fees.
Only the $300,000 represents company revenue.
Recommended Audit Sight Mapping
- Customer and custodial liabilities → Customer Deposits
- Custodial cash → Cash > Bank Account or Cash > Deposits and Investments
- Processing, commission, or management fees → Revenue
Proof of Cash Impact
Changes in the customer liability explain why gross cash activity exceeds the company’s reported revenue and expenses.
4. Treasury and Investment Accounts
Financial services targets may regularly move funds between operating cash, short-term investments, restricted accounts, and treasury vehicles.
Common examples include:
- Treasury investments
- Repurchase agreements
- Restricted cash
- Money market funds
- Investment sweep accounts
Recommended Audit Sight mapping:
Cash > Deposits and Investments
Example
A company transfers $5 million from its operating account into a money market fund and later redeems $3 million.
Neither transaction represents operating revenue or expense. Only the related interest or investment income affects earnings.
Proof of Cash Impact
Proper mapping prevents investment purchases and redemptions from being treated as operating cash flows.
5. Bank Account Mapping and Scope
After the accounting and banking data are imported, each bank account must be mapped to the related GL account.
Key considerations:
- A bank account can belong to only one GL account.
- Multiple bank accounts can roll up to the same GL account.
- A GL account must be tagged as a bank account before it appears as a mapping option.
- Incorrect or out-of-scope bank accounts can be excluded from the analysis.
For financial services targets, scoping is especially important because client, custodial, regulated, and treasury accounts may not all belong in the operating Proof of Cash.
Many of the largest reconciling items arise from mapping and scoping decisions rather than problems with the underlying data.
Summary Mapping Guidance
| Account type | Common examples | Audit Sight mapping |
| Operating cash | Checking, payroll, disbursement, collection or deposit accounts | Cash > Bank Account |
| Customer and regulated cash | Client trust, escrow, custodial, Broker/dealer reserve accounts | Cash > Bank Account (if statements or banking data present) or Cash > Deposits and Investments |
| Treasury and investment cash | Money markets, repurchase agreements, restricted cash | Cash > Deposits and Investments |
| Customer fund liabilities | Client deposits, merchant funds, escrow payable | Customer Deposits |
| Commission and fee income | Broker commissions, management fees, processing fees | Revenue |
| Intercompany balances | Due from or due to affiliates | Intercompany AR or AP |
Final Takeaway
Financial services cash proofs should focus on distinguishing the target’s true operating economics from gross cash movement.
The most important steps are:
- Separate operating cash from customer, regulated, and investment accounts.
- Map customer fund liabilities as Customer Deposits.
- Map treasury and investment accounts as Cash > Deposits and Investments.
- Confirm whether the bank operates gross while revenue is recorded net.
- Review entity and bank-account scope before investigating large variances.
