Internal Controls: Doing More with Less Texas Association of School Business Officials Annual Conference – Dallas March 2, 2016 Presenter: Julie P. Novak, RTSBA Fort Sam Houston ISD
Internal Controls: Words that Come to Mind
1
Internal Controls: Headlines
• Three former Beaumont ISD employees sentenced in warehouse fraud scheme – April 2015 o Fraudulent time sheets submitted; $284,039 restitution ordered o 33 month prison sentence for one; 5 years probation for other two • Former South San Antonio ISD secretary guilty of embezzling football game revenue – May 2013 o $22,420 over 3-year period o 8 year prison sentence
Internal Controls: Headlines • Former Plano ISD employee sentenced to prison; ordered to repay millions he stole from district – April 2015 o $2.69 million from 2004 to 2013 o Set up two shell companies; fraudulent invoices submitted to satisfy his gambling addiction o Restitution ordered and 51-month prison sentence • Former Lohn ISD business manager sentenced in embezzlement case – September 2014 o >$500,000 over 6-year period in federal funds in bogus check scam o Lohn ISD student enrollment = 120 o Restitution ordered and 2 year prison sentence
2
Internal Controls: What Does It Mean • Internal control means a process designed to provide reasonable assurances regarding the achievement of objectives in o Reliability of financial reporting o Effectiveness and efficiency of operations o Compliance with applicable laws and regulations • Process affected by Board of Trustees, management, other personnel Source: Texas Education Agency Financial Accountability Resource Guide
Internal Controls: Components Control Environment
Monitoring
Information & Communication Systems
Risk Assessment
Control Activities
Source: Texas Education Agency Financial Accountability Resource Guide
3
Internal Controls: Components Integrity Ethics
HR Practices
Competence
Control Environment Organizational Structure; Authority & Responsibility
Governing Body’s Participation Philosophy & Operating Style
Source: Texas Education Agency Financial Accountability Resource Guide
Internal Controls: Components New Personnel Technology Changes
New Projects
Risk Assessment Rapid Growth
Organizational Restructuring
Regulatory Changes
Source: Texas Education Agency Financial Accountability Resource Guide
4
Internal Controls: Components Control Activities
Authorization
Asset Accountability
Safeguarding
Segregation of Duties
Source: Texas Education Agency Financial Accountability Resource Guide
Internal Controls: Components Information & Communication Identify & Record Valid Transactions Proper Measurement of Value of Transactions
Detailed Transaction Descriptions
Record Transactions in Proper Time Period
Proper Presentation in Financial Statements
Source: Texas Education Agency Financial Accountability Resource Guide
5
Internal Controls: Components Monitoring Report Deficiencies
Examine Ratios & Indicators
Manage Ongoing Activities Source: Texas Education Agency Financial Accountability Resource Guide
Internal Controls: Tone at the Top Board Policies • Policy BJA (Local) – Superintendent / Qualifications and Duties o Superintendent shall . . . Maintain a system of internal controls to deter and monitor for fraud or financial impropriety in the District • Policy CAA (Local) – Fiscal Management Goals and Objectives / Financial Ethics o Superintendent or designee shall maintain a system of internal controls to deter and monitor for fraud or financial impropriety in the District
6
Internal Controls: Tone at the Top Board Policies • Policy DH (Local) – Employee Standards of Conduct o Each District employee shall perform his or her duties in accordance with state and federal law, District policy, and ethical standards • Policy DH (Exhibit) – Educators’ Code of Ethics o Standard 1.2 – The educator shall not knowingly misappropriate, divert, or use monies, personnel, property, or equipment committed to his or her charge for personal gain or advantage o Standard 1.3 – The educator shall not submit fraudulent requests for reimbursement, expenses, or pay
Internal Controls: Tone at the Top Leadership – District and Campus Administration • Talk the Talk • More importantly - Walk the Talk • Management’s actions speak louder than words • Procedures, practices, and behaviors should reflect Board policies • Communicate info at employee orientation and training
7
Internal Controls: Consequences of Absence
Lack of Adequate Internal Controls = Potential for . . .
Fraud Theft, Loss, Misuse of Assets Poor Decision-Making Possible Penalties for Non-Compliance Increased Expenditures or Loss of Revenue
Internal Controls: Put It in Writing Organizational Chart • Lines of authority; chain of command
Written Job Descriptions • Defines major areas of responsibilities • Provides for accountability and separation of duties • Signed by employee and supervisor annually • Update as needed
8
Internal Controls: Put It in Writing Fiscal Procedures Manual • Each district, regardless of size, needs a written fiscal procedures manual • If your district doesn’t have a manual, develop one – No Excuses! • Look online at other districts’ manuals • Contact other business managers • TASBO Recorded Webinars • Update annually or as needed
Internal Controls: Put It in Writing Federal Grants – New EDGAR – Education Department General Administrative Regulations • Effective Dec. 26, 2014 • 2 CFR Part 200 • Internal controls required by Section 200.303 • More info available at: o http://www.ecfr.gov/cgi-bin/textidx?tpl=/ecfrbrowse/Title02/2cfr200_main_02.tpl o http://tea.texas.gov/Finance_and_Grants/Grants/Administering_a _Grant/The_New_EDGAR/
9
Internal Controls: Building a Tool-Kit in a Small School District
Internal Controls: Small School Districts Characteristics of Small School Districts • Limited staff – accounting department may be limited to 1 to 4 staff members • Multiple hats worn – accounting, purchasing, payroll, vendor disbursements • Segregation of duties can be difficult
10
Internal Controls: Small School Districts Effective Internal Controls should . . . • Provide reasonable, but not absolute, assurance for safeguarding assets, reliability of financial information, legal and regulatory compliance • Cost of controls not exceed benefit derived from it • Be based on sound business judgment
Internal Controls: Small School Districts •
• • • •
Segregation of Duties - May be necessary to utilize staff outside of accounting department, such as Superintendent, for reviews and approvals Cross-train staff as much as possible Communicate regularly with staff; make them feel valued and needed Pay attention to vendor and stakeholder comments Appropriate and timely action taken with improper employee behavior
11
Internal Controls: Small School Districts
Excerpt
• When many hats are worn by staff members, time becomes a precious commodity • Use a calendar to schedule routine items such as preparing and reviewing monthly reconciliations • Use checklists – TEA Resource Guide has Internal Control Checklist with 35 items on it (Section 1.5.3)
Internal Controls: Small School Districts Common Control Procedures to Have in Place • Unauthorized Access o Physical locks to inventories of supplies and commodities o Currency and checks in a safe or locked drawer o Alarm systems on buildings o Passwords and user identification for computer programs
12
Internal Controls: Small School Districts Common Control Procedures to Have in Place • Authorized Access – Preventative Controls o Use system controls to limit access in software – Accounting, HR/Payroll, Requisitions, Student Data o Review periodically! o Dual controls with bank accounts – two authorizations required for wire transfers, ACH payments o Change passwords on a regular basis
Internal Controls: Small School Districts Common Control Procedures to Have in Place • Reconciliations, Comparisons, Analytical & Transactional Reviews – Detective Controls o Regular bank reconciliations – prepared and reviewed by different employees o Fixed assets review – send inventory lists to campuses for verification o Expenditure and revenue comparisons – current year to date to prior year to date
13
Internal Controls: Small School Districts Common Control Procedures to Have in Place • Reconciliations, Comparisons, Analytical & Transactional Reviews – Detective Controls o Supervisor approval of time sheets and leave requests o Investigate when employee does not routinely clock out for lunch o Vendor invoices need to have sufficient detail o Have additional approver for checks issued over a specific dollar amount
Internal Controls: Small School Districts Common Control Procedures to Have in Place • Computer Controls o Test new systems prior to implementation o Program changes need to be properly authorized and documented o Equipment safeguarded against theft, power and temperature fluctuations, and electronic viruses o Backup and recovery systems in place and tested periodically o Cross-training of staff o Train all employees on importance of maintaining confidentiality of passwords
14
Internal Controls: Small School Districts Activity Funds • Student and Campus Accounts o Student accounts belong to the students; district functions as custodians o Campus accounts are controlled by principal o Fundraisers provide a target-rich environment for fraud and theft o Provide training for sponsors o Ensure campuses utilize receipt forms and fundraiser approval/recap forms o Principal should approve and monitor all fundraisers
Internal Controls: Small School Districts Be on the Watch for . . . • Team work is great, but be aware of employees who frequently volunteer to perform tasks not in job description, especially if money is involved • Employees who consistently work late or on weekends • Disgruntled employees; change in behaviors • Change in employee’s lifestyle • Excessive personal calls or texts
15
Internal Controls: Small School Districts References and Sources • Texas Education Agency Financial Accountability Resource Guide o Module 1 – Financial Accounting and Reporting; Section 1.5 Internal Control • Guide to Internal Controls from Association of Public Treasurers; written by Dana J. Kavander and Harlita H. Robinson • Evaluating Internal Controls from Government Finance Officers Association; written by Stephen J. Gauthier
Contact Information: Julie P. Novak, RTSBA Fort Sam Houston ISD
[email protected] 210-368-8705
16