MASBO 2009 Suzanne E.

Smith, CPA

What are Internal Controls?

Internal accounting controls are a series of procedures

designed to promote and protect sound management practices, both general and financial in nature. The controls promote:
Financial information that is reliable and timely
Assets and records of the school district that are

safeguarded (not stolen, misused, or accidentally destroyed) The school districts policies being followed Government regulations being met

Why Should We Be Concerned with this Thing called Internal Control?

Both the school board and district management are

charged with safeguarding all inflowing monies in the form of tax dollars and other grants and awards and with safeguarding all assets and other resources purchased with these monies. (If you receive tax dollars, you are accountable.) Auditing Standards now call for a risk-based audit, which identifies major control cycles in a district and alerts the auditor to areas of risk that may require more attention during the annual audit. (There may no longer be the concept of auditing around controls.) (New for 2007-2008 audits) School Districts are now, more than ever, being held accountable for the absence of adequate control systems.

The Components of Internal Control of any District

The Control Environment
Risk Assessment Control Activities Information and Communication Monitoring

Phase I
The Control Environment
The ethics and integrity of the board, the

administration, and the employees of the district The commitment to competence at all levels The administrations operating style and attitude towards controls Human resource policies (and practices) Organizational structure

The Control Environment and the Accounts Payable Cycle

How does management and the board perceive the

accounts payable cycle in your district? Are there high expectations for highly ethical behavior surrounding all aspects of ordering and paying for goods and services provided to the district? How would you board react to embezzlement concealed in the accounts payable cycle? Is honesty and integrity important to top-level administration in your district?

Phase 2 - Risk Assessment

Each school district is different. A precondition to risk

assessment is the establishment of clear, consistent financial goals.

Examples of Financial Goals that Surrounding the Accounts

Payable Cycle:

No violations of state purchasing laws; No violations of School Board purchasing policies; Authorization for all purchases prior to the purchase being made no exceptions; Best practices in purchasing that will realize the most value for each dollar being spent; Prompt vendor payment within 45 days of the receipt of services/goods.

Phase 3 - Control Activities

The Biggie in terms of commitment
Internal control activities are the policies, procedures,

techniques, and mechanisms that help ensure that district managements directives to minimize risks are carried out. Control activities occur at all levels and functions of the district. They include approvals, authorizations, verifications, reconciliations, performance reviews, and the production of records and documentation.

Phase 4 - Information and Communication

Internally generated information is critical to

achieving the districts financial objectives.

Financial reports

Understandable Correct

Budget reports Outstanding purchase order reports

Phase 5 - Monitoring
Any control system must be continually monitored

and updated in order to continue to work effectively. The district should emphasize to managers that they have responsibility for internal control and that they should monitor the effectiveness of control activities as part of their regular duties.

The Purchasing Cycle

Order initiation/approval
Purchase Order issuance Arrival of goods/services

Invoicing by vendor
Accumulation of documents for the claims packet Approval of the claim Payment of the claim Recording of the transaction Reconciliation of cash

Segregation of Duties
No one individual should be responsible for all facets

of the purchasing cycle. The more segregation of the duties in the purchasing cycle, the more difficult it is for someone to commit fraud or for errors to be made in the process. Segregation of duties is vitally important.

Control Activities that will Minimize Risks Associated with Accounts Payable Cycle
Segregation of the duties of: Transaction Authorization Purchase Order Preparation/Approval Claims Preparation Claims Approval Two levels

Administrator School Board

Mailing/Preparation of Accounts Payable Checks

Reconciliation of the Accounts Payable Clearing Bank

Account

Control Activities that will Minimize Risks Associated with Accounts Payable Cycle
Responsibilities

for expenditure approval function segregated from those responsibilities for the actual purchase order preparation and purchasing functions.
Both supervisory review and approval and administrative

approval should be given for a purchase transaction before the purchase order is prepared and signed by the purchasing agent.

Supervisor Approves the purchase itself Administrator Approves the account number and affirms that the purchase is allowable per department or program guidelines

It is okay for the purchasing agent to both prepare and sign a

purchase order. It is not okay for the purchasing agent to be the only approval for the purchase.

Control Activities that will Minimize Risks Associated with Accounts Payable Cycle
The responsibilities for disbursement/expenditure preparation and approval functions should be segregated from those for recording cash disbursements into ledgers. Approval for purchase (Administrator)

Care must be taken to ensure that the proper account number is being used

Accounts Payable Payment Packet Preparation (Accounts Payable Clerk) Approval of claims packet (Administrator) Approval of Claims Docket (School Board) Preparation of Accounts Payable Checks/Signature of Checks (Automated System)

Independent review of cash disbursements listing Independent mailing of checks to vendors

Recording Cash Disbursements (Automated System) Independent reconciliation of claims docket total to cash disbursements total. Easier when combined with the movement of money to the accounts payable clearing bank account. Accounts Payable Clearing Fund Bank Account Reconciliation (Business

Manager or Designee)

Procedural Controls for Accounts Payable/Disbursements

All disbursements/expenditures should be required to be

supported by invoices or other forms of documentation. All claims for payment should be approved by a responsible person before they are added to the claims docket.
Invoice matched with requisition, receiving report, and

purchase order copy Invoice checked for mathematical accuracy and applicable discounts Evidence of this review

Reimbursements for travel should require a form of pre-

authorization at the appropriate district level.

 How can you effectively cancel an invoice to prevent the

payment of the invoice twice in error?

You will more than likely be asked to answer this question by

your auditor. Can you remember a case when you paid an invoice twice? Has this happened more than once?

Effective cancellation can be a part of the overall software. Does someone balance vendor statements each month? Why is this important?

Purchase Orders
Purchase orders are a vitally important document for

the control and documentation of purchases. Are they pre-numbered?

Remember: The computer may assign numbers

Are they properly accounted for? Manual vs. Computer Are they properly approved? Who should approve purchase orders?

Competitive Purchasing
Are state purchasing laws followed?
Does the district have a centralized purchasing

department?
Why this is important? Why training is important

Are competitive quotes sought for amounts less than

$5,000?

Legal Requirements
Driven by Code Section 31-7-13
Requirements for a single purchase Defined as the

amount encumbered by a single purchase order.

Purchase orders must not be split in order to

circumvent state law. How do you prevent the splitting of purchase orders?

Which purchases does are encompassed by Section 31-7-13 ?

Commodities and printing
Contracts for garbage collection or disposal Contracts for solid waste collection or disposal

Contracts for sewage collection or disposal

Contracts for public construction Contracts for rentals A purchase includes buying, renting, leasing, or

otherwise acquiring

What are Commodities?

Code Section 31-7-1 defines commodities to include

various supplies, goods, merchandise, furniture, equipment, automotive equipment of every kind, and other personal property.

Small purchases
Purchases not over $5,000 (exclusive of freight and/or

shipping charges) Competitive bids and/or advertising for formal bids not required. Should competitive bids be sought anyway?

Midrange Purchases
Purchases over $5,000 but not over $25,000 (exclusive

of freight and/or shipping charges) Two competitive written quotes must be obtained.

Competitive Written

What controls are in place in your district to ensure

that competitive written quotes are obtained when necessary?

Large Purchases
Purchases over $25,000 (exclusive of freight and/or

shipping charges) Advertisement for formal, competitive bids required.

Advertise for 2 weeks Clerk of the School Board must review the bid notice

prior to the time the publication is made

What controls are in place in your district to ensure

that formal competitive bids are secured when necessary?

Lease Purchase Authorization

Code Section 31-7-13(e) gives authority for a lease-

purchase of equipment. (Bid/quote rules apply) Lease-purchase financing may be obtained from the vendor or another source after obtaining at least 2 competitive bids.
Rate is limited to amount permitted by Code Section 75-

17-101 Term is limited to the useful life of the equipment as set by IRS guidelines Must contain an annual allocation dependency clause

Emergency Purchase Procedure

If a School District experiences an emergency that calls

for the purchase of commodities or repairs and if the delay that would be caused by the competitive bid process would be detrimental to the School District, then the provisions in state law for competitive bidding do not apply. The purchasing agent of the School District may approve the purchase or repair. At the next School Board meeting, the purchase must be identified and placed in the board minutes.

What Constitutes an Emergency?

An emergency is an event that is outside the control of

the School District, such as a flood, fire, explosion, storm, earthquake, epidemic, or riot. Lack of planning does not constitute an emergency. A knowledgeable purchasing agent should help define what constitutes an emergency. Documentation is part of this overall control.

Exceptions from Bidding Requirements

Outside equipment repairs (with exceptions)
In-house equipment repairs (with exceptions) Raw gravel or dirt

Governmental equipment auctions Prior board approval required Perishable supplies or food for use in the school lunch

program Items purchased on State Contract

Federal Purchases
For all Federal purchases Does a person responsible for program expenditures and knowledgeable of the types of expenditures allowed from each program

Approve the purchase requisition before a purchase order is issued? Review the claims packets prior to final payment?

Paying Claims
Are all disbursements made by check/warrant? Exception for petty cash Are only pre-printed, pre-numbered checks/warrants

used?
Exception for laser checks

Are pre-printed checks controlled? Limited access Logging of useage Physical controls

 Are voided checks/warrants properly mutilated and

held for inspection? Are checks/warrants protected against alteration?

Who has last custody?

Are checks/warrants made payable to a specific payee? Is the advance signing of checks/warrants prohibited? What types of signatures are required? Machine generated Manual

The need for an imprest fund

An accounts payable imprest fund/bank account is

used to pay all claims. The bank account is reconciled by a person independent of the accounts payable processing duties. The bank account is reconciled on a timely basis.

The Vendor Master File

The vendor master file houses information on all

vendors. Each quarter, management should run a report from the system showing changes to the vendor master file. New vendors should be added by a person independent of the accounts payable processing function.

The need for an imprest fund

An accounts payable clearing imprest fund/bank

account is used to pay all claims. The bank account is reconciled by a person independent of the accounts payable/purchasing duties. The bank account is reconciled on a timely basis. The bank account is fully reconciled.

Bond Employees
Bond employees.
Why? No system of internal controls is 100% effective. State-mandated bonds.

Principals Purchasing Agents

Monitoring Opportunities
State Department Audit
Private Audit Internal Audit

Errors or other Mishaps