Internal Controls, Student Activity and Enterprise Funds

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Internal Controls,Student Activityand
Enterprise Funds
Presented by Scott Clelland
Iselin, Livingston, Flemington, New
York www.wiss.com
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Overview of the Program

• General Overview of Internal Controls
• Recently issued Comptroller Guide for Internal
  Controls
• Student Activity Funds
• Enterprise Funds
• Questions

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Understanding Internal Controls

• What are Internal Controls?
• Internal Controls are an integral part of any
  organizations policies and procedures, that can
  be affected by its Board, management, and other
  personnel, that is designed to provide reasonable
  (not absolute!) assurance regarding the
  achievement of the following objectives
• Protecting its resources against waste, abuse,
  fraud or inefficiency
• Reliability and accuracy of financial reporting
• Effectiveness and efficiency of operations
• Compliance with laws and regulations

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Understanding Internal Controls

• Why are Internal Controls Important?
• They help protect us from bad things happening!
• As accountants we are very risk adverse
  individuals
• Internal Controls help mitigate risk
• Wont eliminate risk

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Understanding Internal Controls

• Internal Controls Are Simple?
• What do you worry about going wrong?
• What keeps you up at night?
• What steps have been taken to assure it doesnt
  go wrong?
• Where are those internal controls?
• How do you know everything is under control?
• Have you looked to see if everything is working
  correctly?

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Understanding Internal Controls

• We implement internal controls in our everyday
  life
• Lock the front door before we leave our house
  everyday
• Lock the doors to our car when we go shopping
• Balance your checkbook
• Matching credit card receipts to monthly
  statements
• Only purchase items online if the website has a
  secure portal
• Keep copies of important information such as your
  tax returns

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Office of the State Comptroller-Internal Control
Guide

• Recently issued (November 2011)
• Stresses the need to reassess internal controls
  and the importance of maintaining a strong
  internal control environment
• Major component is the ongoing monitoring of the
  internal control environment to ensure controls
  continue to be adequate and function properly in
  light of current conditions

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Office of the State Comptroller-Internal Control
Guide

• Factors that affect internal controls
• External
• New regulations/statutes
• State aid
• Economic conditions
• Internal
• Employee turnover in key positions
• Technological changes

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Understanding Internal Controls

• COSOs Internal Control Framework
• Five concepts dependent on each other
• Control Environment
• Risk Assessment
• Control Activities
• Information Communication
• Monitoring

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Understanding Internal Controls

• Monitoring
• After internal controls are put in place, their
  effectiveness needs to be monitored from time to
  time to ensure that the controls in place
  continue to be adequate and continue to function
  properly
• Are they operating as intended?
• Have the controls become outdated, redundant or
  obsolete?
• Management and the Board of the District should
  also monitor previously identified deficiencies
  to ensure they are corrected

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Basic Internal Controls

• Effective Oversight
• Approvals
• Make sure everyone is aware of policy and
  procedures
• Make sure everyone understands the controls
• Make sure everyone understands the repercussions
  if internal controls are not followed
• Communication as a deterrent
• Monitoring

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Characteristics of Fraud-The Fraud Triangle

• 3 Conditions generally present when fraud occurs
• Management or other employees have an Incentive
  or are under pressure, which provides a reason to
  commit fraud
• The absence of controls, ineffective controls, or
  the ability of management to override controls
  provides an opportunity for a fraud to be
  perpetrated
• Those involved are able to rationalize committing
  a fraudulent act. Some individuals possess an
  attitude, character, or set of unethical values
  that allow them to knowingly commit a dishonest
  act.

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Student Activity (SAF) and Enterprise Funds

• Student Activity / Athletic Funds
• Enterprise Funds
• Food Service Mgt./Cafeteria Operations
• Other Enterprise Funds
• Before and After School Programs
• Community Education programs

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Student Activity and Athletic Funds

• Are your controls sufficient?
• Is there proper oversight and monitoring?
• Are the responsible employees aware of the
  oversight and monitoring?
• There are significant funds that flow thru the
  high school student activity accounts and
  sometimes the middle school-they should be
  reviewed and monitored more than they are
  currently-additional oversight

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Student Activity and Athletic Funds

• Although in most cases, the funds are the
  responsibilities of the individual schools,
  indirect responsibility for supervision falls on
  the Board of Education
• Districts should have good policies and
  procedures in place for use of the funds
• Districts are required to formally approve each
  fund in the district
• Districts must ensure that financial and
  bookkeeping controls are established and
  functioning properly

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Student Activity and Athletic Funds

• Board Policy should include at least the
  following
• Receipts must be detailed showing date, source,
  purpose and amount.
• All receipts are required to be promptly
  deposited and bank deposits must agree with the
  receipts in the cash receipt book and must be
  traceable to supporting receipts or groups of
  receipts.
• Disbursements must be recorded chronologically
  showing date, vendor, check number, purpose and
  amount. All disbursements must be made by check
  and supported by a claim, bill or written order
  to the persons supervising the fund. Checks
  should bear 2 or more signatures.

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Student Activity and Athletic Funds

• Board Policy should include at least the
  following
• Book balances must be reconciled with bank
  balances and cancelled checks must be retained
  for examination by auditor
• Student activity funds must be classified by
  school
• Borrowing from the student activity funds is
  prohibited
• Maintenance of complete sets of cash receipt and
  disbursement records

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Student Activity and Athletic Funds

• Fund Raising in Schools by Outside Organizations
• Charitable organizations
• Not subject to audit
• Board must give permission for collection to be
  made in schools
• Collector of funds serving as a private citizen
  and not employee of the District
• Accurate records should be maintained but not the
  responsibility of the District
• Collected funds should not be commingled. If
  commingled, funds become subjected to annual
  audit

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Student Activity and Athletic Funds

• Funds of Teacher Organizations and Parent Teacher
  Organizations
• Funds for these type organizations should be
  maintained by the separate organization and not
  commingled with the SAF
• Board should not be responsible for these funds
• If commingled, places some responsibility on the
  Board and funds become subject to audit
• A school employee who serves on one of these
  Boards does so as a private citizen
• Entities should have a separate ID number and NFP
  status letter

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Student Activity and Athletic Funds

• Funds Collected by Teachers from Pupils for
  Immediate Purchase of Items
• Teachers may at times receive money from children
  for the purchase of magazines, tickets, etc. in
  bulk to save money for the children
• State believes the teacher is representing the
  children and not the school and the teacher
  assumed full responsibility for the collection of
  and use of the funds

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Student Activity and Athletic Funds

• Items identified as control deficiencies or in
  violation of State guidelines-SAF
• No formal policy in place directing the schools
  as to how the funds can be utilized
• Items purchased from SAF that should be processed
  through the normal district purchasing process
• No oversight at all by business office. Although
  not required, it is a good idea to request
  information and review
• Bank reconciliations not performed

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Student Activity and Athletic Funds

• Items identified as control deficiencies or in
  violation of State guidelines-SAF
• Sunshine funds maintained for special school
  parties and commingled with SAF
• Funds not used for the originally intended
  purpose or disbursed for non-student related
  purposes
• No policy in place to address what happens when
  there are funds remaining after the event or
  purchase
• Class funds that remain after that class has
  graduated
• Refunds

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Student Activity and Athletic Funds

• Items identified as control deficiencies or in
  violation of State guidelines-SAF
• No actual purchase order or payment process in
  place
• No supporting documentation for receipts or
  disbursements
• One signature on checks
• No live signatures on checks
• Cash collected and held for significant period of
  time and not deposited
• No approval process prior to goods or services
  being ordered

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Student Activity and Athletic Funds

• Items identified as control deficiencies or in
  violation of State guidelines-SAF
• Employees paid from the SAF to chaperone, etc.
  and not included as income on employees W-2
• 1099s not issued for vendors that exceed the IRS
  threshold
• Circumvention of the procurement
  process/bids/quotes
• Bank accounts established without Board approval
• Outside organizations and sunshine accounts using
  the Districts bank accounts and ID numbers

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Student Activity and Athletic Funds

• Items identified as control deficiencies or in
  violation of State guidelines-SAF
• Receipts from tickets sales not reconciled with
  actual tickets sold/issued-many use a
  standardized worksheet that documents the 1st and
  last ticket number issued and is reconciled to
  the cash deposited
• Receipts for funds collected by individuals (one
  person collecting for members of a team) are
  usually held until all funds are collected and
  there is no listing of who the funds were
  received from (untimely deposits-higher risk of
  theft or misplacing)
• Poor reconciliation over funds collected and
  disbursed

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Student Activity and Athletic Funds

• Items identified as control deficiencies or in
  violation of State guidelines-Athletic Funds
• 1099s not issued where appropriate
• Checks are many times drawn up and signed prior
  to the referee performing the service. If they
  do not show and provide the service, checks are
  later voided
• Lack of referee sign-in sheets-each ref should be
  pre authorized and there should be some type of
  sign in sheet to document that they refereed,
  which is reviewed by AD or other authorized
  individual
• Controls over how and for what purpose the
  athletic funds are used

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Things to Consider-SAF and Athletic Funds

• Make sure you have a good policy in place that is
  clear how funds should be collected and used
• Make sure the individuals responsible for
  controlling the accounts are aware of their
  responsibilities
• Recirculate policy at the commencement of each
  school year
• Require quarterly reports or some type of
  information to be sent to the business office so
  that there is some oversight and deterrent from
  misusing the funds

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Things to Consider-SAF and Athletic Funds

• Audit findings are not addressed properly and
  become repeat comments that impact QSAC score
• Neglected by school district as they are
  maintained by schools but ultimately are
  responsibility of the Board
• Know at least what is going on-there is a lot of
  money being collected and spent from many of the
  accounts
• Risk of embarrassment more so than a material
  loss to the District

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Things to Consider-SAF and Athletic Funds

• No commingling of funds-once they are in the
  Districts name they are subject to audit
• Hold those responsible more accountable
• Bring the records into the business office if
  controls not followed
• Most importantly-monitor to some degree what is
  flowing through the books of the school
  activities
• Sample forms and policy follow

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Case Studies of Things That Could Go Wrong

• Student Activity Fund Case Study
• Cash and checks received by club advisor
• Funds turned over to Treasurer
• Checks deposited
• Cash taken by Treasurer
• How the fraud was discovered

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Case Studies of Things That Could Go Wrong

• Athletic Fund Case Study
• Access to blank check stock and signature plates
• Duplicate check created
• Used odd amount on check
• Deposited check in out of state bank
• How the fraud was discovered
• Impact - 25,000

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Enterprise Funds

• Used to account for transactions that are similar
  to business operations in the private sector
• Most common examples
• Regional Day Schools
• Community or Adult Ed programs
• Before and After School Programs
• Food service programs
• Other Latchkey programs

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Enterprise Funds

• Should be maintained in the Districts general
  ledger system
• Controls should be similar to the controls over
  the normal operations of the District
• Invoices included on bill list
• Funds must be reconciled by Treasurer or Board
  designated individual
• Food service management company or internal

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Food Service Enterprise Fund

• All income must be deposited in any District
  approved bank and reconciled monthly
• Food service funds must be accounted for
  separately from all other funds
• Board may by resolution designate the Board
  Secretary or other person to approve payments
  without Board Approval to expedite payment
  process
• Loans or advances from the Board to a food
  service management company are prohibited

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Food Service Enterprise Fund

• Food service company must provide itemized claims
  for services and goods for reimbursement
• Must have a contract with the food service
  management company that clearly lays out the
  terms
• Samples of forms and requirements are outlined in
  section II-60 in the State Audit Program

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Food Service Enterprise Fund

• Most districts contract with an outside
  management company
• Management fee-verified?
• Break even requirement and refunds-are the
  calculations correct
• Contribution of capital assets and amortization
  as part of the contract-are they recorded?
• Who owns the inventory-is it recorded

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Food Service Enterprise Fund

• Reconciliation of meals served per the operating
  statement to meal count sheets. There was a
  recent issue regarding the overstatement of meals
  served and operating statement results
• Reconciliation of commodities from operating
  statement to Department of Agriculture
  records/confirm
• Capital asset purchase agreement arrangements
• Discounts received on purchases by the FSMC must
  be passed on to the District

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Food Service Enterprise Fund

• Operating Statement
• Does anyone look at it?
• Is it accurate or reasonable?
• Are you only concerned whether or not you are
  breaking even?

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Food Service Enterprise Fund

• Operating Statement Issues Identified
• Revenues misrepresented
• Inventory miscalculated
• Expenditures from other districts charged to your
  district
• Free and reduced meals not recorded properly
• There are many ways in which errors can occur and
  not be detected by the District
• Who understands it completely

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Food Service Enterprise Fund

• Receivables, deferred revenues and prepaid
  accounts-student online accounts
• Equipment purchases by vendor and amortization
• Timing of recording of cash versus accrual
• Services provided to other entities and related
  receivable and revenue
• Issues with credit card purchases and
  reconciliation to operating statement

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Case Studies of Things That Could Go Wrong

• Food Service Management/Cafeteria Operations
• Misappropriation or inaccurate recording of
  Inventory
• Incomplete recording of cash transactions
• Fraudulent time sheets of part time workers
• Erroneous reporting of free and reduced meals
• Manipulation of operating statements

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Case Studies of Things That Could Go Wrong

• Food Service Operations
• Manipulation of the Operating Statement
• Contract with vendor-guarantee included
• Inaccurate reporting of state and federal
  subsidies and inventory
• Drives profit to meet guarantee
• How the error was discovered
• Impact - 45,000

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Case Studies of Things That Could Go Wrong

• Cash Receipts-Food Service Fraud Example
• Incomplete recording of cash
• Replacement of cash with checks
• Miscellaneous unanticipated revenue

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Case Studies of Things That Could Go Wrong

• Enterprise Fund Cash Receipts Case Study
• Procedures to divert cash
• Collections of unanticipated revenue
• How the fraud was discovered
• Impact - 90,000

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Suggestions for Implementing Additional
Controls-Food Service Enterprise Fund

• Make sure you understand everything that is in
  the contract
• Let the vendor know you are looking at the
  management report closely
• Recalculate some of the amounts and review for
  reasonableness
• Make sure the guarantee is met and if not that
  the District receives a refund as per agreement
• Did you get the equipment that was included in
  the contract?
• Do not just rely on the operating statement
  without looking at it

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Conclusion and Wrap-Up

• Limitations on Internal Control
• Only as good as the people using it
• Management override of any control can cause a
  deficiency to occur
• Collusion by two or more people can render a
  control ineffective
• Monitoring Important

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Conclusion and Wrap-up

• Any questions you can reach me at
• Scott Clelland 732-283-9300

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Conclusion and Wrap-up

• Questions????