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4/12/2016
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Patti Schroeder, Finance Support Director at
Iowa Association of School Boards (IASB)
and Iowa ASBO member
Information you can use to address Internal Control within your school district.
Introduction to Iowa’s booklet: Segregation of Financial Duties in the Smaller Public School to Improve Financial Internal Controls. (Iowa’s story)
SBO/CFO/Entity requests
DOE/Federal Government
Audit Reports
Insurance
Fraud cases
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Many, many audits have segregation of duties comments:
Cash Wire Transfers Receipts Disbursements Payroll School Lunch Program Financial Reporting
When segregation of duties cited, it is always labeled as a:
Material weakness
That is, internal control is weak, misstatements could occur and not be detected and corrected in a timely basis
Insurance companies have had a huge amount of bond losses, due in large part to lack of proper segregation of duties.
As a result, Iowa insurers will not increase any bond limits on any Iowa school until proper segregation of duties has occurred.
Proper segregation of duties will only be increased
once improper segregation of duties no longer appears as a material or significant finding on a school district’s audit.
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School District: Two losses from same occurrence, one an employee theft loss for $510,000 and the other a faithful performance loss for $500,000. Business office supervisor deposited checks received into an unapproved checking account and numerous unapproved CD’s that were opened by and controlled by the thief. District officials had no knowledge of the checking account or CD’s. Insured suffered total loss of more than $1,200,000.
Insurance Carrier said:
This loss largely caused by inadequate segregation of duties, little internal controls, poor documentation of checks received by the district, and inadequate supervision by supervisor (District Treasurer).
Setting An Employee Dishonesty Limit
The Surety Association of America, an organization which compiles
employee dishonesty premium and loss data, has published a guide to help
select minimum bond limits. It is worth using this as a guide when your
district is selecting an employee dishonesty limit.
“Exposure factor = 20% of current assets plus 10% of annual revenue.
The principal current asset of a school district is cash.
Example: $ 2,000,000 cash in the bank
$25,000,000 in annual revenues
Exposure factor = (.2 x 2,000,000) + (.10 x 25,000,000) = $2,900,000.
An exposure factor of $2,900,000 results in a minimum bond limit in the
$200,000 to $300,000 range.
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Undeposited collections
Unauthorized cash withdrawals
Set up separate bank account, diverted district funds: • From summer softball camps • From the football program
Made personal expenditures from bank account
Charged personal purchases to district issued procurement card
Paid out unauthorized (perhaps unincurred) overtime
“Her bosses made it easy.”
“Maybe we were naïve in counting on one person to look after the accounts.”
Without that documentation, you can’t tell specifically what was purchased.”
61% - undeposited collections
55% - improper purchases from vendors
37% - payroll / extra pay
31% - improper reimbursements
21% - improper credit card payments or
purchases
14% - cash withdrawals
Mary Mosiman, CPA, Iowa Auditor of State
4/12/2016
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Frequent cash collections
Limited administrative and other personnel
Lack of segregation of duties
Lack of oversight – blind trust / failure to be involved by governing body
Perception “money is unlimited” compared to employee’s finances
Mary Mosiman, CPA, Iowa Auditor of State
Year Number of Claims Dollars of Loss
1993 1 $34,899
1994 1 22,125
1995 0 0
1996 0 0
1997 1 1,462
1998 1 629
1999 3 3,544
2000 0 0
2001 3 3,401
2002 5 59,500
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Year Number of Claims Dollars of Loss
2003 2 $217,227
2004 4 $52,852
2005 12 69,875
2006 14 159,930
2007 14 263,190
2008 16 194,981
2009 11 154,623
2010 12 1,919,481
2011 12 209,569
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Year Number of Claims Dollars of Loss
2003 2 $217,227
2004 4 $52,852
2005 12 69,875
2006 14 159,930
2007 14 263,190
2008 16 194,981
2009 11 154,623
2010 12 1,919,481
2011 12 209,569
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Year Number of Claims Dollars of Loss
2012 9 $183,820
2013 16 $107,459
2014 15
$ 96,622
2015 7 $ 24,669
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No single person should have control over two or more phases of
a task, process or transaction
OR another way to say that is…
More than one person should be required to complete any task
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Greater accuracy
Find errors quickly
Deter mismanagement/fraud
Provide checks & balances
Protect DISTRICT and SBO/CFO!
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Access
(to Assets)
Custody, control or handling of asset : • Cash; checks; receipts; deposits; credit cards; safes;
lock boxes • Equipment; receipt of new purchases; inventories • Paychecks /vendor checks - printing or distribution
Authorization
Reviewing and approval of task or transaction or operation such as approval of:
• Bank account adjustments or transfers; • purchase orders or requisitions; • use or disposition of an assets; • changes in pay or benefits; • timesheets or leave requests; • change orders; • IT programming changes; • adjusting journal entries
Accounting • Creating or maintaining records, such as cash
receipts, requisitions • Maintaining inventory records
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RECONCILIATION RECONCILIATION RECONCILIATION RECONCILIATION
Comparison or review of transactions:
• Timely bank reconciliations
• Surprise petty cash counts
• Timely review of IT edits – new employees; benefits; new vendors
• Comparison of goods received to what was ordered
• Payroll and benefit reconciliations
• Physical inventory and reconciliation
• Comparison of accounting records to reports
• Analytical review 20
1. Drafted “best practice” templates on segregation of duties for a:
One person Business Office Two person Office Three person Office
2. Then asked Committee of “Auditor-types” to review, provide suggestions… but not bless.
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Member School District
Johna Clancy Gilbert (now Indianola)
Jill Gavin Martensdale-St. Marys
Sue Huls Sigourney
Patti Schroeder Iowa Assn. of School Boards
Shonna Trudo Van Meter
Member
Organization/School District
Pam Bormann Andy Nielsen
Iowa State Auditor’s Office
Mary Babinet Nolte, Cornman & Johnson, PC
Kevin Baccam Southeast Polk Schools
Ryan Eidahl Saydel Schools
Kristy Weiss Northeast Schools
Access
Authorization Accounting
(Reconciliation)
Duty/
Transaction Step
Person(s)
Responsible for Duty/Step
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PETTY CASH, CASH IN BANK, INVESTMENTS
SEGREGATION OF DUTIES
MODEL – ONE PERSON OFFICE
DUTY SBO OUTSIDE BUSINESS OFFICE
NON-DISTRICT
EMPLOYEE
Access Initiates request to open/close bank/investment accounts and public depositories
X
Authorization Approves/signs off on opening/closing of bank/investment accounts and public depositories
X Board
PETTY CASH, CASH IN BANK, INVESTMENTS
SEGREGATION OF DUTIES
MODEL – TWO PERSON OFFICE
DUTY SBO
PERSON 2
OUTSIDE BUSINESS
OFFICE
NON-DISTRICT
EMPLOYEE
Access Initiates request to open/close bank/ investment accounts and public depositories
X
Authorization Approves/signs off on opening/closing bank/investment accounts and public depositories
X Board
PETTY CASH, CASH IN BANK, INVESTMENTS
SEGREGATION OF DUTIES
MODEL – THREE PERSON OFFICE
DUTY SBO PERSON 2
PERSON 3
OUTSIDE BUSINESS
OFFICE
NON-DISTRICT
EMPLOYEE
Access Initiates request to open/close bank/investment accounts and public depositories
X
Authorization Approves/signs off on opening/closing bank/investment accounts and public depositories
X Board
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Size of Business
Office
SBO Person 2
Person 3
Outside Business Office
Non-District
Employee
One Person
X X X
Two Person
X X X X
Three Person
X X X
Examples
Superintendent, Principal, School secretary, Supt’s secretary IT person
Treasurer (or designee outside Business Office) Board Member
1 STUDENT ACTIVITY FUNDS – GATES/ADMISSION FEES
2 CASH/PETTY CASH/CHANGE FUNDS/CASH IN
BANK/INVESTMENTS
3 RECEIPTS/REVENUES/RECEIVABLES
4 DISBURSEMENTS/EXPENDITURES/PAYABLES /
PURCHASING/CREDIT CARDS
5 PAYROLL
6 FINANCIAL REPORTING
Should always have at least two people involved; but not always the same two people
Consider periodically contacting local banks for entities using district name or federal tax ID
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Who receives bank statements and performs bank reconciliation is crucial!
Let bank(s) know who is authorized to do what – insist on dual authorization of all bank/wire transfers
Consider “citizen” Treasurer
All checks should be stamped immediately “For Deposit Only”
Initial listings of receipts should be made before cash/check is handed off to another person and matched to deposit
Limit the number of staff with ability to authorize purchases and/or credit card charges.
Authorization should be separate from ordering and receipt of goods and services.
Limit access to credit cards to only the authorized holder/user of the credit card.
Who receives bank statements and performs bank reconciliation is crucial!
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Should have a clear segregation of HR (hiring, salary rate setting, benefit changes) and Payroll functions.
Let bank know who is authorized to do what – insist on dual authorization of all bank/wire transfers
Have someone who is not involved in HR or Payroll receive, distribute and/or mail all payroll checks.
Better yet, insist on direct deposit for all employees!
Access to assets should not be necessary when preparing financial reports.
Reports should be prepared by someone who does not have access to assets, nor does the daily accounting.
AND/OR
Critical analytical review should be done by someone who did not prepare the reports.
Must look outside Business Office for leverage:
Superintendent
Clerical assistance
IT personnel
School Building personnel
Treasurer (or designee outside the Business Office)
Board members
Others
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Maximize use of technology!
On-line fees payment system
Direct deposit for all employees
District only credit cards
Limit access to all accounting, banking, payroll, purchasing and programming to only those with a legitimate need for access
Limit SBO /CFO access as well
Review Insurance coverage
How Will Insurance Coverage Help?
(example) 1) Faithful Performance (or really lack thereof) is a covered
cause of loss
2) Must be able to prove the loss -
i.e. document what is gone, not just illustrate that we
have less than we should have had.
3) It must be a covered cause of loss, not just bad
behavior.
Paying for your daughter’s wedding with the corporate
credit card was covered.
Paying his wife a fee for lavishly decorating his office was
not covered.
4) Money for external costs to establish a proof of loss
is often covered.
EMC pays up to $10,000 based on the size of the loss.
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Investigate every anomaly:
◦ “We bought a DVD and my check never got cashed…”
◦ “My daughter paid for a shirt - never got a shirt..”
Ask your auditor for advice!
◦ “Specifically, how can we change how we are doing a certain transaction cycle to make it even stronger?” “Will it erase the comment in our audit?”
◦ “Can you review all expenses related to… Superintendent, SBO, HR Director…”
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Contact IASBO Assistant Director, Nancy Blow at:
[email protected] to purchase and mail you a booklet ($10) or to PDF you a copy at no cost!
Thanks!!
