Unit Fiscal Responsibility, Safeguards Against Fraud, and Internal Controls

1
Unit Fiscal Responsibility, Safeguards Against
Fraud, and Internal Controls

• Presented by
• Internal Audit
• sponsored by the department of
• Business Administrator Services as part of the
• Departmental Fiscal Management
• workshop series

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Presenters

• Carissa Burns, CPA
• Manager, Internal Audit
• cburns_at_kent.edu
• Michele Newton, CPA
• Auditor, Internal Audit
• manewton_at_kent.edu
• Ken Shook
• Student Auditor, Internal Audit

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Panel Members

• Chris Jenkins
• Police Officer 2, Police Services
• cdjenkin_at_kent.edu
• Susan Cole
• Associate University Registrar, Registrars
  Office
• scole_at_kent.edu

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Internal Controls
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Definition of Internal Controls

• Processes Procedures in place to achieve
  management objectives and reduce risk
• Accounting controls
• Safeguarding university assets
• Creation and maintenance of reliable accurate
  financial and operational information

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Definition of Internal Controls

• Administrative controls
• Compliance with policies, plans, state/federal
  laws and regulations
• Economical and efficient use of university
  resources

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Definition of Internal Controls

• Preventive controls are designed to prevent
• Invalid transactions from being processed
• Misappropriation of assets
• Detective controls are designed to identify
• Errors or irregularities in transactions already
  processed
• Missing assets or invalid disbursements

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Types of Internal Controls

• Authorization and approval procedures
• For hiring, purchases, travel, etc.
• Reconciliation procedures
• Physicals safeguards against theft of university
  equipment
• Cash handling policies and procedures
• Information systems security procedures

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Types of Internal Controls

• Proper documentation
• Adequate supervision
• Independent validation of transaction accuracy

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Types of Internal Controls

• Segregation of duties
• No one individual should be in a position to
  control all aspects of a transaction
• No one individual should initiate, approve,
  record, reconcile transactions, reconcile
  balances, handle assets, and review reports
• Management review is critical for smaller units
  where fewer individuals are available

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Written Internal Control Procedures

• Why are written procedures necessary?
• Day-to-day guidance and reference to staff
• To promote continuity of operations during
  prolonged employee absences or turnover
• Training new employees
• Enhanced efficiency

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Control Self-Assessment Questionnaire

• CSA Questionnaire is available on the Internal
  Audit website at
• http//www.kent.edu/internalaudit/assessment-chec
  k.cfm
• Management tool to self-assess the internal
  control environment risk in department
• A no response indicates a potential weakness
• Action should be taken to resolve any weaknesses
• Internal Audit is available to consult on
  possible solutions to correct weaknesses

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Internal Control Examples

• Reconciliation Procedures
• Equipment Inventory Safeguards

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Reconciliation Procedures

• Reconcile to bring together or to agree
• Example Personal checking account reconciliation
• Departmental account reconciliation
• Account reconciliations are important to ensure
• Expenditures charged to the departments account
  were properly authorized and charged to the
  correct account subcode
• Revenues earned/collected by the department have
  been credited to the correct account subcode

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4 Step Reconciliation Procedure

• Obtain monthly Financial Records System (FRS)
  statements for the departmental account number
  from
• http//financial-info.kent.edu
• Agree (match) each expenditure and revenue
  transaction in the FRS financial reports to
  supporting documentation

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4 Step Reconciliation Procedure

• Note whether correcting entries from previous
  months reconciliations have been posted to this
  months financial reports. Discuss correcting
  entries with the Comptrollers office, if
  necessary.
• Obtain managements review and approval
• Departmental account reconciliations should be
  performed monthly

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Reconciliation Procedures

• Investigate the source of the transaction for any
  of the following
• An entry for which you do not have supporting
  documentation
• An amount that is different on FRS than the
  amount on the supporting documentation
• An amount in the wrong account or subcode

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Reconciliation Procedures -What is an Audit Trail?
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Reconciliation Procedures -Audit Trail Definition

• An audit trail is the supporting (back-up)
  documentation retained in the department
• To provide an explanation of the transactions
  appearing on monthly FRS financial reports
• Examples are approved expense reimbursements,
  purchase orders, personnel action forms,
  invoices, airline ticket receipts, etc.
• Certain supporting documentation can be in an
  electronic format

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Reconciliation Procedures Audit Trail

• Supporting documentation should be retained in
  well-organized files for future reference
• For a small department with few financial
  transactions
• One file for the fiscal year to hold
  documentation of pending invoices, etc. not yet
  charged to the departmental account
• One file for each month of the fiscal year to
  hold invoices, etc., that have been paid and
  charged to the departmental account

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Reconciliation Procedures Audit Trail

• For larger departments with a high volume of
  transaction activity
• One active or current file for each vendor
  for each fiscal year to hold unpaid (pending)
  invoices, etc.
• One file for each vendor for each fiscal year to
  hold paid invoices, resolved correspondence,
  etc.

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Reconciliation Procedures Audit Trail

• Shadow Systems
• Departmental management tool to track
  transactions and generate internal reports for
  financial planning purposes
• May be simple, such as a ledger or an Excel
  spreadsheet used to log check requests
• May be complex, such as Dining Services Diebold
  Series 5 computer system, or pc software like
  Peachtree, Quickbooks, etc.

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Reconciliation Procedures Audit Trail

• Dining Services Diebold Series 5 computer system
• Provides back-up detail (supporting
  documentation) of all daily Flashcard activity
• Flashcard transactions hit Series 5 as they occur
  and are later grouped in batches for journal
  entries to FRS
• Compare supporting documentation to shadow system
  reports, and
• Compare shadow system reports to FRS reports

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Reconciliation Procedures Monthly Payroll
Expenditures

• Obtain the monthly Labor Distribution report
  and Report of Transactions from FRS at
• http//financial-info.kent.edu/
• Compare payroll subcodes and amounts on FRS
  reports to supporting documentation to ensure
  proper authorization and correct (or at least
  reasonable) amounts are reflected in the
  departmental account
• Compare with copies of timecards or internally
  generated summary sheets
• Verify salary increases other position activity

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Purchase Order Reconciliations

• A P.O. is
• required for purchases gt 2500
• a contractual agreement with a vendor
• a budgetary tool to encumber (set-aside)
  departmental budget dollars to cover the purchase
  amount on the P.O. to minimize risk of
  overspending

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Purchase Order Reconciliations

• Compare the invoice or shipping documents to the
  P.O. when goods are received to verify quantities
  and descriptions are correct
• Reconcile Purchase Order activity to FRS on a
  monthly basis
• FRS may show payment of an invoice that has gone
  directly to Procurement-Payments and been paid

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Purchasing Card Reconciliations

• Reconcile Purchasing Card activity to monthly
  statement from card company on a timely basis

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Purchasing Card Reconciliations

• Reconcile amounts allocated on Purchasing Card
  Payment Form to amounts shown on the departments
  monthly FRS statements.
• P-card payments will show as
• CC PYMT (credit card payment) on FRS in the
  department account and subcode indicated on the
  Payment Form.

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Purchasing Card Reconciliations

• Obtain original documentation for each purchase
• Retain all original documentation in departmental
  files per record retention guidelines
• Maintain a log to track details of each purchase
  users name, date of purchase, merchant (vendor)
  name, item description, dollar amount, etc.
  (P-Card manual pg. 15)

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Record Retention Guidelines

• University policy regarding record retention
  3342-5-40
• http//imagine.kent.edu/policyreg/
• Cash receipts, purchase orders, purchase
  requisitions require 4 year record retention per
  Ohio Revised Code (ORC)
• http//imagine.kent.edu/recordsretention/
• Record retention requirements for grant fund
  expenditures may be longer

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Equipment Inventory Safeguards
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Equipment Inventory gt 2500

• KSU policy requires physical inventory of
  property and equipment gt 2500 every 2 years to
  comply with Federal and State regulations to
• Ensure material accuracy on KSU financial
  statements
• Verify existence of inventory
• Verify completeness of list

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Equipment Inventory gt 2500

• Equipment Inventory Department List reflects
  equipment with purchase price gt 2500 available
  from Inventory Control Phone 22350
• KSU I.D. tag
• Update list in a timely manner for acquisitions,
  transfers and dispositions of equipment

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Equipment Inventory lt 2500

• Department must track/safeguard equipment lt 2500
• Contact person/accountability for patches related
  to viruses, bots, worms
• Departmental list to include purchase date, cost,
  manufacturer, model, serial , location and
  responsible individual
• Update list periodically for acquisitions,
  disposals, transfers
• Permanently mark items Property of KSU to deter
  risk of theft

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Equipment Inventory Dispositions

• KSU Policy 3342-5-23 Administrative policy and
  procedures regarding purchasing, sales, and
  disposal of property and inventory control
• http//imagine.kent.edu/policyreg/

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Equipment Inventory Dispositions

• Disposal of equipment is at the departments
  discretion
• Items should first be offered free of charge to
  any university department for redistribution
  through the Procurement Department Surplus
  Equipment Redistribution and/or Disposal website
  at http//finance.kent.edu/surplus/

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Equipment Inventory Dispositions

• The Inventory Control Property Disposition form
  is required for equipment inventory items
• gt 2500 when
• Transferring an item to another department
• Disposing of an item which is no longer usable
• The form is available on the BAS website
  http//www.kent.edu/bas/forms/

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Equipment Inventory Dispositions

• Contact Campus Environment Operations (C E O)
  for pick up of equipment
• Provide C E O with a copy of the disposition
  form at the time of pick up, and retain a copy
  for departmental files
• Forward the original disposition form to
  Inventory Control, 233 Michael Schwartz Center

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Computer Disposals

• KSU is responsible for safeguarding sensitive
  information relating to students and employees
• Prior to disposal or transfer of computers, act
  with due diligence to erase/reformat
  information from the hard drive
• Specific guidance will be forthcoming in response
  to FERPA,HIPAA, GLB

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Safeguards Against Fraud
I wonder if they know about internal controls
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Fraud Facts

• Association of Certified Fraud Examiners Survey
  results
• Fraud and related abuse average 400 billion
  annually in U.S.
• Average embezzlement is 127,500 from small
  business
• Often times a trusted employee is involved

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Fraud Facts Forms of Fraud

• Embezzlement
• Kickbacks
• Pilferage
• Check fraud
• Ghost employee schemes
• Fictitious vendor schemes
• Conflicts of Interest

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Fraud Facts Forms of Fraud

• Asset misappropriation
• Expense Statement Fraud
• Non-business related transactions
• Overstatements of expenditures
• Fictitious expenses
• Multiple reimbursements

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Fraud Facts

• Internal controls over expense statements should
  include
• Required receipt and documentation retention
• Review of receipts and documentation by
  approver/supervisor prior to approval
• Procedures to recognize trends/red flags such as
• Increasing amounts
• Variations from budgeted expenses
• Unreasonable changes
• Periodic review by Internal Audit/External
  Auditors

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The Fraud Triangle
NEED
OPPORTUNITY
RATIONALIZATION
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The Fraud Triangle

• NEED
• Financial Stress
• Drug or Gambling Habit
• Work-Related
• Desire for Success

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The Fraud Triangle

• OPPORTUNITY
• Weak or non-existent internal controls
• Lack of segregation of duties
• Highly decentralized organization
• Lack of knowledge/awareness

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The Fraud Triangle

• RATIONALIZATION
• Perpetrator convinces self of moral righteousness
  makes it all right
• Ill pay it back
• Im underpaid I deserve more
• I work harder than the top brass
• Frustration at missed
• promotions, raises, etc.

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Red Flags of Fraud

• Marked personality changes in employee
• Financial pressure on employee calls from
  creditors at work
• Employee living beyond his/her means
• Employee having outside business interests
• Lax management
• Too much control in key employees
• Rising department expenses

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Fraud at Kent State University

• Incidences at KSU in 2002 - 2003
• Similarities
• Lack of segregation of duties
• Weak or non-existent reconciliation procedures
• Theft of several thousand
• Young individuals with families probably with
  financial need

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Fraud at Kent State University

• Results to employee
• Termination by KSU
• Embarrassing publicity
• Possible penalties
• Possible prison time
• Results to university
• Embarrassing publicity
• Possible costly fines based on U.S Federal
  Sentencing Guidelines

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Fraud Awareness

• Federal government will judge organization by
  these factors
• Absence of proper internal controls
• Participation by high level management
• Previous violations
• Lack of anti-fraud procedures
• Lack of ethics training

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Reduce the Risk of Fraud

• HOW?
• Conduct Control Self-Assessment
• Develop and implement written internal controls
• Segregation of Duties
• Surprise spot checks
• Create awareness

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Reduce the Risk of Misappropriation of Assets

• Perform timely reconciliations
• Track equipment inventory dispositions
• Use Employee Exit Checklist
• Incorporate cash handling Procedures
• Safeguard timecards payroll checks

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Termination/Exit Checklist

• The Checklist for Terminating/Transferring
  Employees form is an internal control tool at
  KSU to ensure the safeguarding of university
  assets and information
• The form is available on the HRS website at
• http//hrservices.kent.edu/Tools/formsearch.asp
• Obtain employee and supervisor signatures
• Forward to HRS for hourly and contract staff
• Forward to Academic Personnel for faculty and
  graduate assistants

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Internal Control Examples - Cash Handling
Procedures
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Cash Handling Procedures - Standard Cash
Handling Tips

• Administrative Policy 3342-7-03 Protection of
  University Funds
• (Revised 3/24/04)
• http//imagine.kent.edu/policyreg/
• All individuals handling university money, both
  cash and checks are, in effect, responsible to
  the state of Ohio for its proper security and
  accountability.

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Standard Cash Handling Tips

• Receipt book system
• Multi-part, pre-numbered receipt book
• Provide a receipt for payor immediately upon
  collection of funds retain a copy in receipt
  book
• Retain a copy of voided receipts in receipt book
  to account for all activity
• Reconcile cash received to receipt copies in book
• Investigate differences prepare deposit
• Becomes part of audit trail documentation

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Standard Cash Handling Tips

• All checks should be restrictively endorsed For
  Deposit Only - Kent State University or Kent
  State University Foundation immediately upon
  receipt
• Collections need to be deposited intact no
  expenditures should be made from funds collected
• Segregation of duties person preparing the
  deposit should be someone other than the person
  who collected the cash

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Standard Cash Handling Tips

• Safeguard all cash collections, preferably in a
  locked safe
• Make periodic changes of the safe combination,
  password, or lock
• Deposits should be made the same day or the next
  business day

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Standard Cash Handling TipsFor Cash Register
Operations

• Cashiers should count their change funds before
  putting them in the drawer of the cash register
• Only one cashier should work from the drawer at
  any given time, or develop a method to
  distinguish between cashiers to maintain
  accountability for all transactions
• Someone other than the cashier should approve
  voided transactions

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Standard Cash Handling TipsFor Cash Register
Operations

• The check suspension list, issued weekly by the
  Bursars Office, should be reviewed before
  accepting checks
• Cash register readings should be taken when a
  cashiers shift ends, when a relief cashier takes
  over, and at any other appropriate times
  throughout the day
• Segregation of duties a person other than the
  cashier should prepare the deposit after the
  cashier has balanced the drawer

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MiscellaneousCash Handling Issues

• Course Related Fees
• Pre-approval by Board of Trustees required
• Published in University Fee Register
• An internal control to regulate fees charged to
  students
• For Course Related Fee Approval
• Contact Curriculum Services in the Office of the
  Provost Phone 22220
• Course related fees will be charged to students
  account with Bursars Office avoids cash
  handling

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Miscellaneous Cash Handling Issues

• Gifts Monetary Non-Monetary should be
  reported to the KSU Foundation for proper
  acknowledgement. Phone 22222
• Report gifted equipment and other non-monetary
  items gt 2500 to Inventory Control
• Phone 22350

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Petty Cash Change Funds

• Guidelines for Petty Cash/Change Funds,
  Instructions and Forms are available at
• http//www.kent.edu/comptroller/PettyCashChangeFu
  nd.cfm

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Petty Cash

• When a Petty Cash account is opened, an
  individual in the department is assigned as
  custodian of the funds
• Responsible for accounting for and safeguarding
  the cash and securing proper receipts
• Limit use of Petty Cash accounts
• Per Policy 3342-7-03 Administrative Policy
  Regarding Protection of University Funds
• The Purchasing Card should be used when possible
  to avoid sales tax charges by vendors KSU is a
  tax exempt organization

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Petty Cash

• All purchases must be supported by proper
  documentation such as an original receipt or cash
  register tape
• Retain documentation in department
• Request for Petty Cash or Change Fund form
• should be used to
• Establish/Increase petty cash account
• Change the custodian of the account

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Petty Cash

• Reconcile the receipts and cash remaining in the
  petty cash fund
• Request funds to replenish the petty cash fund
• Allocate expenditures to the appropriate
  accounts/subcodes for items purchased
• Reimburse the fund at least monthly or as needed,
  and prior to fiscal yearend (June 30)
• To decrease or close a petty cash account,
  contact the Comptrollers Office for instructions
  
• Phone 22392

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Change Funds

• The sole purpose of a change fund is to make
  change
• An individual in the department is assigned as
  custodian of the funds, and is responsible for
• Accounting record keeping for the fund
• Safeguarding the cash and securing and retaining
  proper supporting documentation

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Change Funds

• The change fund amount must always remain the
  same
• No purchases are to be made from this fund
• Not to be used for cashing checks
• Request for Petty Cash or Change Fund form
  should be used to
• Establish/Increase change fund account
• Change the custodian of the account

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Change Funds

• Perform a reconciliation of the change fund on a
  regular basis
• To decrease or close a change fund account,
  contact the Comptrollers Office for instructions
• Phone 22392

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Timecards Internal Controls

• Someone other than the employee should deliver
  timecards to Payroll
• When using Campus Mail, place timecards in a
  sealed envelope to avoid unauthorized scrutiny of
  and alterations to private or confidential
  information
• Notify Payroll immediately upon termination of an
  employee
• Phone 22637

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Kronos Time and Attendance

• Benefits
• Eliminates timecards through use of Flashcard
• Consistent timekeeping practices
• Real-time leave and sick accrual reporting
• Enhanced scheduling capabilities

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Safeguard Payroll Checks

• Only authorized personnel may distribute payroll
  checks
• Store in safe or locked filing cabinet
• Checks that remain
• undistributed after
• one week should be
• mailed to the recipients
• home address

75
Authorized Bank Accounts

• An authorized bank account is recorded on the
  universitys books and uses the universitys
  Employer Identification Number (EIN)
• An unauthorized bank account is not recorded on
  the universitys books. It uses the university
  EIN, but was never given authorization by the
  V.P. for Administration
• Bank account guidelines are available at
• http//www.kent.edu/Comptroller/UniversityBankAcc
  ount.cfm

76
Authorized Bank Accounts

• A supplemental university bank account can be
  opened with authorization from the V.P. for
  Administration, who must be the signatory on the
  account
• The Comptrollers Office can assist in
  determining if an existing bank account is
  authorized
• To verify the EIN on a supplemental account,
  contact the bank of record

77
Authorized Bank Accounts Other Options

• If the activities of the group or club are
  clearly separate from and unrelated to university
  operations, consider these options
• Set up a KSU agency account through the
  Comptrollers Office
• KSU acts as a bank for the clubs activities
• Not a separate bank account
• Make deposits at Bursars Office
• Use check requests to access money in the account

78
Authorized Bank Accounts Other Options

• Establish a separate checking account
• Apply for an EIN for your group using form SS-4
  available from the IRS
• http//www.irs.gov/pub/irs-fill/fss4.pdf
• Use the new EIN to establish a new account with a
  bank or credit union
• OR
• Use a group members SSN or your own SSN to
  identify the account at the bank

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Importance of Timely Transaction Processing

• Decentralized environment makes timely
  submissions critical
• Allow sufficient time for approvals
• Be aware of year-end cut-off dates for
  submissions of invoices, deposits, etc.

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QUESTIONS
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Resources

• Internal Audit
• phone 22341 http//www.kent.edu/
  internalaudit/
• Comptrollers Office
• phone 22352
• http//www.kent.edu/comptroller/
• Bursars Office
• phone 22626 http//www.kent.edu/bursa
  r/

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Resources

• Procurement Department
• phone 22607
• http//www.kent.edu/procurement/
• Payroll Department
• phone 22637
• http//www.kent.edu/comptroller/Payroll/index.cfm
• Treasury,Tax, and Risk Management Services
• phone 23751
• http//www.kent.edu/ttrms/
• Campus Environment Operations
• phone 22345
• http//www.kent.edu/ceo/

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Resources

• Police Services
• phone 23070
• http//dept.kent.edu/vph/police/ksupd.htm
• Office of University Registrar
• phone 23131
• http//www.registrars.kent.edu/home/
• Business Administrator Services
• phone 27500
• http//www.kent.edu/bas/

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Unit Fiscal Responsibility, Safeguards Against
Fraud, and Internal Controls

• Thanks for attending!