Notes, Suggestions, and Other Ideas
Series B
Number 1
P
R
E
S
I
D
E
N
T
I
A
L
Internal Control
Boards of Trustees and college administrators carry fiduciary responsibility for their
organizations, and thus, need to be sure adequate internal controls are in place. In 1987,
the National Commission on Fraudulent Financial Reporting launched a major research
project to bring more uniformity to internal control assessment. In 1991, the United States
Sentencing Commission adopted guidelines for criminal penalties in “white collar” crime
resulting in a significant reduction in penalties for organizations that have in place an
effective system for detecting violations of law.
A.
L
E
A
D
E
R
S
H
I
P
To be considered effective, five components must be included.
1.
Control environment -- The “tone” of an organization must be healthy with
emphasis on competence, integrity, and clear policies and procedures.
2.
Risk assessment -- Analyzing the risk to an organization and setting objectives
accordingly is a management responsibility. Smaller organizations may be less
formal and rely on face-to-face contact rather than formal written reports, but an
awareness concerning risk is important.
3.
Control activity -- This includes setting appropriate policies and procedures over
the accounting functions to assure compliance and accurate, timely reports.
A
S
S
O
C
I
A
T
E
S
4.
Information and communication -- Systems for communicating the right
information on operations, compliance, and finance is essential. Management
should ensure that all employees understand that internal control is important and
must be followed.
5.
Monitoring -- Management needs to be sure that the internal control function is
performing as expected through ongoing normal operations and through specific
evaluations by the auditors.
B.
Internal control is the organizational plan adopted to do the following:
Internal Control, continued_________________________________________
C.
1.
Safeguard assets
2.
Assure adherence to college policies
3.
Secure efficiency in financial administration
4.
Achieve accurate and reliable financial records.
A good system of internal control has at least the following:
1.
Ethical and competent personnel -- Compensation, training, and supervision
contribute to this.
2.
Separation of duties -- If responsibilities are assigned appropriately, the chance of
fraud is reduced. This separation should include the following:
3.
a.
Custody of assets from accounting
b.
Authorization of transactions from custody of assets
c.
Operations from accounting
d.
Separation of responsibilities within accounting
Audits -- An independent outside auditing firm reporting directly to the board is
fundamentally important.
4.
Records -- The use of subsidiary ledgers, prenumbered documents, and timely bank
reconciliations all contribute to internal control.
5.
Technology -- Today, accounting systems depend more on computer systems and
less on printed documents. Thus, systems checks are important including firewall
protection.
6.
Budget -- A carefully developed budget with close monitoring will help identify
significant deviations from the plan. If staff are required to answer for the
deviation, accountability is more likely to be achieved.
7.
Other -- Fireproof files and vaults, control of signature machine, bonding personnel
with access to cash, job rotation, required vacations, and alarm systems are all
components of a good internal control system.
D.
Internal control over cash
1.
Students should receive receipts as transaction records.
William C. Crothers * 810-653-2220 * wmcrothersPLA@AOL.com
2
Internal Control, continued_________________________________________
2.
Cashiers should not have access to accounting records. This will inhibit their
ability to adjust records for cash they might embezzle.
3.
Each day’s receipts should be matched with the daily bank deposit.
4.
Cashiers should be bonded. Fidelity insurance does not protect against theft by an
outside person, but it does protect the organization from embezzlement. A
comprehensive insurance plan is important for total risk management.
5.
Cash should be stored in locked vaults and the bank.
6.
Employees should be rotated among jobs and required to take vacations so that if
there is tampering with records the organization is more likely to discover it.
7.
Petty cash funds need at least four control points:
a.
Only one employee should administer the fund.
b.
All payments should be documented with a signed petty cash ticket.
c.
A specific amount should be allocated to the fund and the petty cash tickets
and cash should always total that set amount.
d.
E.
The fund should be reimbursed through the normal check-writing process.
Internal control over cash payments
1.
Staff who handle checks and computer operators should have no access to
accounting records.
2.
Accountants should not handle cash.
3.
Specific staff should be assigned to approve purchase documents and before checks
are signed. All documentation including proof of receipt of goods should be
attached.
4.
Checks should be prenumbered and blank checks stored in a safe and controlled
location.
5.
Paid invoices should be noted to avoid paying twice.
6.
Signature machine plates should be controlled and the numbering sequence on
checks recorded to make sure there are not missing checks.
Presidential Leadership Associates, LLC
3
Internal Control, continued_________________________________________
F.
Other considerations
1.
The person distributing the payroll checks should be different than the one
preparing the payroll to prevent payment to fictitious persons.
2.
The person responsible for write-offs of accounts receivable should not have access
to the general ledger. This helps ensure that if one embezzles from accounts
receivable, they cannot cover it up by doing a write-off.
3.
Fixed assets should be purchased and disposed only with proper authorization.
Although the accounting profession a detailed fixed asset ledger, the value of
requiring a non-profit to incur the cost of the accounting is questionable. Many
simply videotape all assets periodically for insurance purposes.
4.
College policies must be documented, kept current, and widely distributed.
5.
A well-crafted Board of Trustees policy structure can be very helpful in addressing
areas of vulnerability.
6.
One area that is difficult to control is in the area of gifts that are personally handed
to a development officer. If the employee falsified records and opened a bank
account in the name of the institution but maintained authority to write checks on
that account, they could simply take the funds, send a false receipt, and not report
it. This is why it is important that more than one person have a relationship with
each donor.
7.
When there are few people in the business office to appropriately segregate duties,
careful internal control design becomes more important. The objective is to make
sure no single person is in a position that he or she can perpetuate and conceal
irregularities while doing their assigned duties.
Presidential Leadership Associates, LLC
4