Internal Controls

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Internal Controls

• Presented by
• Kathleen T. McNeely
• Assistant Vice President for Finance Indiana
  University

2
Agenda

• What is this thing called Internal Controls?
• Review of Concepts
• Value of Internal Controls
• Specific Challenges in Higher Education

3
Internal Controls

• Internal controls are a system consisting of
  specific policies and procedures designed to
  provide management with reasonable assurance that
  the goals and objectives it believes important to
  the entity will be met.

4
Why have Internal Controls?

• Promote operational efficiency and effectiveness
• Provide reliable financial information
• Safeguard assets and records
• Encourage adherence to prescribed policies
• Comply with regulatory agencies

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Basic Concepts of Internal Controls

• Management, not auditors, must establish and
  maintain the entitys controls
• Internal controls structure should provide
  reasonable assurance that financial reports are
  correctly stated
• No system can be regarded as completely effective
• Should be applied to manual and computerized
  systems

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Value of Internal Controls

• Transactions are
• valid
• property authorized
• Recorded
• properly valued
• Properly classified
• Timely
• Reconciled to subsidiary records

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Control Environment Consists of

• Management philosophy and operating style
• Tone at the top
• Organization structure
• Separation of duties
• Fiscal officer reporting lines
• Assignment of authority and responsibility
• Does everyone understand their role?
• Responsibility without authority

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Control Environment Consists of

• Competent, knowledgeable personnel
• Personnel policies and procedures
• Training and development
• Communication and information systems
• Internal audit function
• Either in-source or outsource
• External influences
• Compliance
• External auditors

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Design a Control System

• Identify RISKS in your environment
• Mission - Compliance
• Transactional - Assets
• Identify control points
• Analyze potential EXPOSURES
• Design system to mitigate RISKS

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Internal Control Procedures

• Personnel
• Proper procedures for authorization
• Adequate separation of duties
• Adequate documents and records
• Physical control over assets and records
• Independent checks on performances

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Other Elements to Remember

• Consistency of policy compliance
• Coordination in a decentralized environment
• Completeness and relevancy of policies
• Issue escalation and resolution process
• Accountability
• Flow of financial information

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Other Elements to Remember cont

• Linkages between technology, process and
  organizational structure
• Alignment of University objectives, risks and
  controls
• Early warning systems
• Training and other HR mechanisms
• Tools and techniques for monitoring

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Key Concepts to Retain

• Internal control is a process. It is a means to
  an end, not an end itself.
• Internal control is affected by people. It is
  not just manuals and policies, but the people at
  all levels of the organization.
• Internal control can be expected to provide
  reasonable assurance, not absolute assurance, to
  an entities management or board.

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Front Page Test

• Ask yourself, and ask your boss, how would you
  feel if this decision were displayed on the front
  page of the newspaper?
• This can be a very effective gage for
  appropriateness

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Higher Education Challenges

• Far removed from primary mission
• Lack of Knowledge/Training
• Decentralized
• Federal Compliance Requirements
• Perceived non-issue
• Cost of Internal Controls
• The future SAS 112

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Higher Education Challenges