Establishing Internal Controls

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Establishing Internal Controls
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Session Objectives

• Provide an understanding of why an organization
  should have internal controls and the impact of
  not having adequate controls
• Understand the key components of internal
  controls
• Work hands on with participants to review
  examples of various policies

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Natl Community Svc. Act of 1990
Code of Fed. Regulations (CFR)
OMB Circulars (part of CFR)
State Local Regulations
NOFO
Notice of Grant Award
Certifications and Assurances
Provisions
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What are Internal Controls?

• Internal controls are processes adopted by an
  organizations board, management and other
  personnel designed to provide reasonable
  assurance regarding the achievement of
• Effectiveness and efficiency of operations
• Reliability of financial reporting
• Compliance with laws and regulations

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What are Internal Controls?

• System of checks and balances
• Protect the organization from financial abuse and
  enhance its ability to achieve its goals
• Not a organizational burden, it is a way to
  optimize of resources

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Why Have Internal Controls?

• Improve accountability to customers (Federal
  Government, CNCS, trustees, etc.)
• Help organization achieve performance and budget
  targets
• Improve reliability of financial reporting
• Improve compliance with laws, regulations
• Prevent loss of resources, public assets and
  public trust

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Internal Control Objectives

• Adequacy of audit trail
• Can a transaction be traced from the accounting
  records back to the original documentation
  (invoice, timesheet)?
• Segregation of duties
• Are the various aspects of the accounting
  functions separated and performed by more than
  one person?
• Physical safeguard of assets
• Protection of the assets of the organization to
  ensure its mission can be carried out
• Adequacy of Records
• Are adequate records maintained to provide a
  proper trail for the audit

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Internal Controls Interrelated Components

• Control environment
• What is the atmosphere of the work environment?
• Risk assessment
• Is your organization considered low risk or high
  risk?
• Control activities
• What activities provide control within your
  organization?
• Information and communication
• Is information communicated clearly to staff and
  is there a means for staff to provide feedback?
• Monitoring
• Are the controls monitored and reviewed to ensure
  that they are appropriate and meeting compliance
  requirements?

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A Good Control Environment Includes

• Positive atmosphere in the work environment
• Existence of a code of conduct and code of ethics
• Written job descriptions
• Timely communications with board of directors
• Written policies to hire, train, promote and
  compensate employees
• Safeguards for employees related to
  whistle-blowing (Sarbanes-Oxley)
• A clear chain of command

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Elements of Good Internal Controls

• Documented policies and procedures
• Adequate review process for financial reports and
  budgets
• Adequate cash management procedures (e.g.,
  monthly bank reconciliations by supervisory
  personnel)
• Physical safeguarding of assets
• System to track participants employees
  activities
• System to follow up on problems to ensure
  resolution

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How Can Internal Controls Impact an Organization?

• Potential impacts of insufficient internal
  controls
• Audit findings
• Federal funds may be managed inappropriately
• Funding sources are jeopardized
• Inconsistencies
• Inefficient use of time and resources

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Audit Findings

• Two types of audit findings
• A questioned cost is what is believed to be a
  violation of a provision of law, regulation,
  contract, grant, cooperative agreement or other
  agreement or document governing the expenditures
  of federal funds.
• A material weakness is a reportable condition in
  which the design or operation of one or more of
  the internal control components does not reduce,
  to a relatively low level, the risk that errors
  or irregularities, in amounts which would be
  material to the financial schedules. This is
  also known as a reportable condition.

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Examples of Audit Findings Due to Inadequate
Internal Controls

• General
• Late submission of financial status reports
• Timesheet/evaluations not signed or dated
• AmeriCorps
• Enrollment/exit of members not in WBRS or not
  submitted on time
• Inappropriate documentation for changes made to
  timesheets
• Senior Corps
• FGP No written improvement plan for students

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Creation and Documentation of Internal Controls

• through Policies and Procedures

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Policies Procedures

• Documented policies and procedures are important
  because
• They are the standards for the organizations
  operations
• They help in maintaining information that is
  crucial to operations that would otherwise remain
  in employees heads
• They help in orienting new employees and
  substitutes if the appropriate personnel are
  absent

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Policies Procedures

• Policies should be established, followed,
  monitored, updated and reviewed
• As times change, so does the need for our
  policies
• Example Internet access to cash accounts and
  ability to make electronic transfers

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Written Policies and Procedures

• Assist with consistency and clear communication
  of expectations
• Policies set expectations what is to be done
• Procedures or processes describe how is it to be
  done
• Effective ones explain rationale and include
  examples of principal transactions and completed
  forms

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Examples of Key Items Included in Policies
Procedures

• Financial reporting
• Budgeting
• Record retention
• Conflict of interest
• Timekeeping

• Authorizations of transactions
• Payroll procedures
• Cash receipts procedures
• Procurement policies
• Travel regulations
• Specific Policies Governing Federal Funds
• FSR completion
• Drawdown of federal funds
• Matching requirements

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Small Group Breakout

• Lets Review YOUR Policies

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Staff Timesheet - Basic Criteria

• Signed and dated by employee or by supervisor
• Reflect after-the-fact time determination of
  actual activity
• Are prepared at least monthly and coincide with
  one or more pay periods
• Account for the total activity for which
  employees are compensated and which is required
  in fulfillment of their obligations to the
  organization
• Provide support for charges for salaries and
  wages must also be supported by records
  indicating the total number of hours worked each
  day in conformance with the Dept. of Labor

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In-kind Contribution - Basic Criteria

• Document the donors basis for determining value
  of personal services, material, equipment,
  building, and land
• Obtain written acknowledgement from the donor to
  include
• Date and location of donation
• Detailed description of item/service
• Estimated value of contribution, how value was
  determined, and who made the determination
• Confirm that the contribution was or was not
  obtained with federal funds
• Name and signature of donor

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Job Description - Basic Criteria

• Job title
• Reports to
• Supervises
• Basic function
• Duties and responsibilities
• Qualifications
• Classification

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Accounting Systems - Basic Criteria

• System must be capable of
• Distinguishing grant versus non-grant related
  expenditures
• Identifying costs by program year
• Identifying costs by budget category
• Differentiating between direct and indirect costs
  (administrative costs)
• Maintains federal/non-federal matching funds
  separately from grant funds
• Records in-kind contribution as both revenues and
  expenses

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Chart of Accounts - Basic Criteria

• Numerical outline of accounts
• Narrative description of each line item
• Note special accounts created to track CNCS
  specific grant funds

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Budgetary Controls - Basic Criteria

• Monitoring of budgets to actual year-to-date and
  current period expenditures or outlays
• Explaining any budget variations that are
  unexpected or unusual and determining necessary
  adjustments
• Ensuring compliance with laws, regulations, and
  CNCS provisions, particularly matching percentage
  requirements
• Requesting prior approvals for modification, if
  necessary
• Assuring budget changes are properly approved
• Reviewing movements between line items and
  verifying if they are within provisions and/or
  guidelines

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Documentation - Basic Criteria

• Documentation should ensure that costs
• Conform to grant/contract limitations
• Are allowable under the budget
• Are treated consistently
• Determined in accordance with Generally Accepted
  Accounting Principles (GAAP)
• All documentation should support
• What services or goods were obtained
• Why the transaction is allowable for the grant
  purposes
• The value of the contribution

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Documentation Information

• Costs need to be
• Allowable
• Allocable
• Reasonable and Necessary
• Documentation should also reflect that these
  requirements were met

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Take it Home!

• Ensure accountability and transparency
• Know that internal controls affect every level in
  all organizations irregardless of size
• Creation and monitoring of internal controls is a
  continual process
• Strong internal controls allow an organization to
  achieve its goals effectively and efficiently
• Review current policies and procedures to be sure
  they will guide you to compliance