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Internal Controls

Why Accounting Systems and Internal Controls?. 2 CFR Part 215 OMB Circular A-110 Standards for Financial Management Systems. Effective control over and accountability for all funds, property and other assets. Recipients shall adequately safeguard all such assets and assure they are used solely for authorized purposes. .

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Internal Controls

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    1. Internal Controls Section 6

    2. Why Accounting Systems and Internal Controls?

    3. 2 CFR Part 215 OMB Circular A-110 Standards for Financial Management Systems Effective control over and accountability for all funds, property and other assets. Recipients shall adequately safeguard all such assets and assure they are used solely for authorized purposes.

    4. Fraud Headlines Over an eight month period, more than $108,000 was stolen from a nonprofit organization in Alaska. The former financial director used the agency's credit cards to purchase more than $88,000 of personal items and cash advances. He also stole roughly $2,500 of petty cash and took $8,500 in 'illegal reimbursements.' As finance officer, he was responsible for record keeping, paying bills, and reconciling credit card statements. The executive director was asked to resign, and said that "...the internal controls weren't in place in the organization." (This was a simple case of too much opportunity and no controls.)

    5. Fraud Headlines In Florida, an employee of an organization that operates Workforce Investment Act programs is charged with single-handedly stealing more than $2.4 million over five years.  A newspaper article stated that the person worked in the accounting department paying vendors and wrote dozens of checks to herself over several years.  She had been employed at the organization since 1994 and had a theft-related record.  When she was hired, the organization did not perform background checks.

    6. Credit Card Theft In New Jersey, the former chief financial officer of a federally funded nonprofit organization pleaded guilty to stealing more than $51,000 from the agency by using her position to authorize payment to credit card companies to pay off her personal debt. (Credit card statements must be reviewed by someone outside of the finance function.

    7. What Are Internal Controls? Internal controls are the measures (procedures) an organization adopts to : Encourage adherence to agency policies and procedures Promote operational efficiency and effectiveness Safeguard assets Ensure reliability of accounting data

    8. Basic Internal Controls Segregation of Duties One should not have responsibility of more than one: Authorization Custody Record keeping Personnel Competent and trustworthy Clear established lines of authority Documented job description and procedures manuals Physical Restrictions Safe Passwords Alarm systems Authorized Procedures Timesheets signed by supervisors Approval of purchases

    9. Separation of Duties in Small Businesses—Cash Receipts, Cash Disbursements, and Payroll Two-person Office Approve and sign checks Sign employee contracts Complete deposit slips Perform interbank transfers Distribute payroll Reconcile petty cash Approve employee time sheets Process vendor invoices Review bank reconciliations and contents of bank statements Record accounts receivable entries Mail checks Write checks Record general ledger entries Reconcile bank statements Record credits/debits in accounting records Approve payroll Receive cash Disburse petty cash Authorize purchase orders Authorize check requests Authorize invoices for payment

    10. Three-Person Office

    11. Four-Person Office

    12. Fraud How Does It Happen?

    14. What is Fraud? An intentional misrepresentation of facts made by an individual to deprive another person or organization of something of value

    16. Motive-Individual Gambling, alcohol/drugs Unexpected expenses-illness,etc Living beyond means-greed Resentment-against boss Getting even, “just taking what they owe me”

    17. Opportunities Organizationally Created Lack of administrative, operational, processing or documentation controls Rapid turnover of key employees Inadequate personnel screening policies Impersonal relationships and low morale Absence of policies and procedures

    18. Opportunities-Personally Created Familiarity with operations, including cover-up capabilities Position of trust where employee is left on their own. Close association with supplies Collusion

    19. Rationalization-End Justifies Means They treat me unfairly and owe me. I am only borrowing the money and I will pay it back. This is a big organization and a little won’t matter to them. Everybody does it. I’ll stop when… Nobody will get hurt.

    20. Case Study Human service agency hires former nun as bookkeeper, Executive Director sympathetic to her. Employee is dedicated, hard working, and committed. Agency is in growth mode. Change to move to automated accounting system was resisted. Efforts to provide additional staff to help her were unsuccessful – one man show. “They didn’t work as hard as she did.” ED trusted this employee explicitly and had personal friendship. Employee was sole contact for auditors. The board trusted her. She became resentful of ED who she felt was not paying enough attention to her. ED felt the workload had increased so significantly that she needed help. She hired a CPA “over” her. Bookkeeper resigned 30 days later with grand “send off.”

    21. Case Outcome Embezzled $83,000 over period of three years Created fake invoices from credible vendors Altered “payee” on checks after they were signed (manual checks) – She received them to mail them She received the bank statements when returned (hard copies) and removed checks she made payable to herself She falsified the bank reconciliation She explained away any inconsistencies to auditors and was believed Embezzled discovered, employee was arrested and charged with grand theft Employee served time in jail and five years probation

    22. Misuse of Grant Funds Time Sheet Fraud Embezzlement Education Award Fraud Theft Common Crimes Detectable by Observing Fraud Indicators

    23. Misuse of Grant Funds Is CNCS grant the major or only funding source Are Federal grant funds being diverted to keep the organization in business Does the grantee drawdown all or most of its grant funds well before the end of grant year

    24. Misuse of Grant Funds Are costs for what appears to be non-grant expenditures being charged to the grant Are funds drawn down on unfilled slots Are unauthorized employee salaries being charged against the grant

    25. Time Sheet Fraud Are service hours being properly documented Are hours being claimed reasonable and allowable Are program officials verifying the hours and type of service claimed Are individuals hand carrying their own time sheet from their sub-sites to grantee’s office Do documents appear to have all been prepared at the same time Are staff employees tracking grant hours

    26. Embezzlement Are secondary endorsements obtained when required Are members/volunteers and staff being paid Are payments being made for “ghost” or absent individuals Do documents show frequent use of white out, pen and ink changes, or strikeouts

    27. Embezzlement Are documents missing or copies being used instead of originals Is there an individual who always has an excuse for a chronic shortage of funds

    28. Fraud Indicators

    29. Fraud Indicators

    30. Education Award Fraud Are hours being certified consistent with hours served? Are staff employees receiving education awards? Are award recipients using their award for non-education expenses?

    31. Education Award Fraud Are early separating members receiving an award without having a compelling reason for ending his/her service? Are program officials awarding bonus or doubling hours? Did members earn their award?

    32. Theft Can receipts for items be traced to a valid purchase? Is property controlled or inventoried for accountability? Are charge card purchases being monitored and verified? Is excessive mileage being claimed for travel to project sites? Does grantee have proper checks and balances in place to safeguard program funds?

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