IPOL 8530—Spring 2010 The Finance Function in Nonprofit & Public Organizations

Alfredo Ortiz

Policies and procedures—Internal controls

Increasing transparency and safeguarding assets

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Reasons for internal controls

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Mostly on the governance side of things

Safeguard the assets of the organization

Prevent unintentional misstatements of accounts and reports

Run the business efficiently, with rules that work, and apply to everyone (consistency)

Create an environment of stewardship and accountability

Compliance with laws and regulations

MIIS--IPOL 8530, "The Finance Function in Social Change Organizations"

Caveats for internal controls Provides reasonable, not absolute assurance that

objectives will be met

Reasonable assurance should provide appropriate balance between risk and level of control—controls must always be gauged to respond to the actual level of risk.

Stronger controls for higher risk levels and fewer controls for lower risk levels.

Cost/benefit?

But…

Policies & procedures around internal controls must first be balanced to fulfill their control need.

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Internal Control per A-133

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A process, effected by an entity's management and other personnel, designed to provide reasonable assurance regarding the achievement of objectives in the following categories

1. Effectiveness and efficiency of operations;2. Reliability of financial reporting; and3. Compliance with applicable laws and

regulations MIIS--IPOL 8530, "The Finance Function in Social Change Organizations"

Questions To Ask When Identifying Risk What assets do we need to protect? Where are

we particularly vulnerable?

What could go wrong?

What activities are regulated by the government?

What’s our greatest legal exposure?

How do we protect our reputation?6 MIIS--IPOL 8530, "The Finance Function in Social Change Organizations"

Common Areas of High Risk Procurement

Equipment

Petty cash

Travel

Payroll

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Internal controls

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The control environment

Risk

Information and communication flows

Control activities

Monitoring

Our internal controls processes should address the following:

MIIS--IPOL 8530, "The Finance Function in Social Change Organizations"

Control environment

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Sets the organizational tone, influences control consciousness of people and is the foundation of internal controls.

Integrity and ethical values

Commitment to competence Human resource policies & practices

Board of directors and audit committee

Management philosophy and operating style

Organizational structure Assignment of authority & responsibility

MIIS--IPOL 8530, "The Finance Function in Social Change Organizations"

Risk—susceptibility of material misstatement

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Inherent risk Comes from within Could have to do with the nature

of the business

Control risk The risk that a company's internal

controls are insufficient to mitigate or detect errors or fraud

Based on assessed strength of internal controls system

Detection risk The risk that the auditor will not

detect a material misstatement that exists in the financial statements

MIIS--IPOL 8530, "The Finance Function in Social Change Organizations"

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Information & communication

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How reliable is the information system and accounting system—technology, structure, maintenance, etc.?

How clear is the communication system regarding individual roles and responsibilities of operating the internal control system?

MIIS--IPOL 8530, "The Finance Function in Social Change Organizations"

Control activities

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Actions or procedures that manage or reduce risk

Preventive and Detective Controls

Preventive – attempt to deter or prevent undesirable events

Detective - attempt to detect undesirable events after the fact

MIIS--IPOL 8530, "The Finance Function in Social Change Organizations"

Control activities

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Information processing controls General systems,

hardware, software

Procedural controls Authorizations Documentation Independent checks

Segregation of duties

Physical controls Activity performance

reviews Continual budget vs.

actual Relationship of non-

financial to financial data Training graduates vs.

training expense

MIIS--IPOL 8530, "The Finance Function in Social Change Organizations"

Monitoring

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Investment in improving processes and innovation

Willingness to allow professional diagnosis for improvement

External audits

Scheduled (but not announced) internal testing of systems

MIIS--IPOL 8530, "The Finance Function in Social Change Organizations"

Reminder—Written procedures

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Test if written procedures exist and are followed covering the following areas: A/R A/P Procurement Inventory and asset control Accounting processes Cost evaluation Other relevant procedures

MIIS--IPOL 8530, "The Finance Function in Social Change Organizations"

Basic Controls

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Control over receipts

Pre-numbered receipts

2 people for Cash collections and mail and make list of receipts

Timely deposits—everything into the bank

Monthly reconciliation to invoices or other billings

Control over disbursements

Always by check with support (use a standard internal doc) Prior authorization Tied to budget (i.e. planned) Contract in place?

More than one sig?

Have someone else reconcile the bank account

MIIS--IPOL 8530, "The Finance Function in Social Change Organizations"

Written procedures—A/R

A/R procedures Simple A/R cycle

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Billing and how invoices are processed

How payment is followed up (avoid overly “aged” AR)

Opening the mail Receiving money Recording receipt of money Depositing money, and, Reconciling bank accounts.

Tracking service delivery

Invoicing

Collecting

Depositing

Reconciling

How and when we bill for

services and get paid

MIIS--IPOL 8530, "The Finance Function in Social Change Organizations"

Written procedures—A/P

Simple A/P procurement cycle A/P procedures

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Needs ID & specs design

Choose product or

service

Internal approval

and purchase

Receipt

Final document-

ation

Verifying proper authorization before checks are run Setting limits on when two signatures

are needed Petty cash system for very small

purchases

No duplicate payments Payment against invoice Bill stamped paid

Control of the check stock

Receipt of goods in proper condition

Easily accessible, relevant documentation

How and when we enter into

purchases and pay our bills

MIIS--IPOL 8530, "The Finance Function in Social Change Organizations"

Definition of Auditing A systematic process of

objectively… evaluating evidence regarding assertions about economic actions and events to ascertain the degree of correspondence between those assertions and established criteria and communicating the results to interested users. Source: American

Accounting Association

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Try this again

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A logical, organized process of examining what you do in comparison with what you should be doing—all measured against established criteria.

The process communicates an opinion as to the reliability of what you say (assert) you do and may help or hurt your credibility as an organization.

Source: Me

MIIS--IPOL 8530, "The Finance Function in Social Change Organizations"

Why are audits needed?

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1. Relevance2. Reliability

Users of financial statements look to the independent auditor’s report to see if these qualities have been met

FASB states that 2 primary qualities make accounting information useful for decision making:

MIIS--IPOL 8530, "The Finance Function in Social Change Organizations"

Required Scope of A-133 Audits

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GAAP Financial Statements Internal Controls Compliance with:

laws, regulations, Provisions of contracts or grant agreements that may

have a direct and material effect on each of its major programs.

Follow upMIIS--IPOL 8530, "The Finance Function in Social Change Organizations"

Auditor minimum expectations

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Perform the audit with: Technical competence Integrity Independence Objectivity

Detect intentional or unintentional material misstatements

Prevent the issuance of misleading financial statements

Stakeholders expect auditors to:

MIIS--IPOL 8530, "The Finance Function in Social Change Organizations"

Internal controls cases http://www.eurojournals.com/irjfe_27_11.pdf

http://www.colorado.edu/ArtsSciences/facultystaff/administration/budget/docs/CaseStudies.pdf

http://jobfunctions.bnet.com/abstract.aspx?docid=55890

Do a Google search—there is tons online25 MIIS--IPOL 8530, "The Finance Function in Social Change Organizations"

Exercise

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Share an internal control story from your own experience. It could be:

Witness of risky behavior or actual loss

Or accident waiting to happen

Something caught in the nick of time, i.e. good procedures

Too much control

Not enough control

Etc.

The scene• What was at

stake?The good

The bad and ugly (drama)

The moral (big ideas)

• Share your story as a blog post either individually or as a group.

• If as a group, create a single group story mixing the best of all the stories

• Make it dramatic• Exaggerate to make a point• Change names and dates to protect the

innocent• Use the framework below to guide your

discussion if needed• Post the story to the wiki (1 for the group)

• If individual, post individually

MIIS--IPOL 8530, "The Finance Function in Social Change Organizations"