Establishing Internal Controls

Financial and Grants Management Institute - March 18-20, 2008

Session Objectives
1. Provide an understanding of why an organization should have internal controls and the impact of not having adequate controls 2. Understand the key components of internal controls 3. Work hands on with participants to review examples of various policies
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Natl & Community Svc. Act of 1990 Code of Fed. Regulations (CFR) OMB Circulars (part of CFR) State & Local Regulations NOFO Notice of Grant Award

Certifications and Assurances

Provisions

What are Internal Controls?

Internal controls are processes adopted by an organizations board, management and other personnel designed to provide reasonable assurance regarding the achievement of:
Effectiveness and efficiency of operations Reliability of financial reporting Compliance with laws and regulations

Financial and Grants Management Institute - March 18-20, 2008

What are Internal Controls?

System of checks and balances Protect the organization from financial abuse and enhance its ability to achieve its goals Not a organizational burden, it is a way to optimize of resources

Financial and Grants Management Institute - March 18-20, 2008

Why Have Internal Controls?

Improve accountability to customers (Federal Government, CNCS, trustees, etc.) Help organization achieve performance and budget targets Improve reliability of financial reporting Improve compliance with laws, regulations Prevent loss of resources, public assets and public trust
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Internal Control Objectives

Adequacy of audit trail
Can a transaction be traced from the accounting records back to the original documentation (invoice, timesheet)?

Segregation of duties
Are the various aspects of the accounting functions separated and performed by more than one person?

Physical safeguard of assets

Protection of the assets of the organization to ensure its mission can be carried out

Adequacy of Records
Are adequate records maintained to provide a proper trail for the audit

Financial and Grants Management Institute - March 18-20, 2008

Internal Controls Interrelated Components

Control environment Risk assessment Control activities
What is the atmosphere of the work environment? Is your organization considered low risk or high risk? What activities provide control within your organization? Is information communicated clearly to staff and is there a means for staff to provide feedback? Are the controls monitored and reviewed to ensure that they are appropriate and meeting compliance requirements?

Information and communication

Monitoring

Financial and Grants Management Institute - March 18-20, 2008

Positive atmosphere in the work environment Existence of a code of conduct and code of ethics Written job descriptions Timely communications with board of directors Written policies to hire, train, promote and compensate employees Safeguards for employees related to whistleblowing (Sarbanes-Oxley) A clear chain of command
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A Good Control Environment Includes:

Elements of Good Internal Controls

Documented policies and procedures Adequate review process for financial reports and budgets Adequate cash management procedures (e.g., monthly bank reconciliations by supervisory personnel) Physical safeguarding of assets System to track participants & employees activities System to follow up on problems to ensure resolution

Financial and Grants Management Institute - March 18-20, 2008

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How Can Internal Controls Impact an Organization?

Potential impacts of insufficient internal controls:
Audit findings Federal funds may be managed inappropriately Funding sources are jeopardized Inconsistencies Inefficient use of time and resources

Financial and Grants Management Institute - March 18-20, 2008

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Audit Findings
Two types of audit findings
A questioned cost is what is believed to be a violation of a provision of law, regulation, contract, grant, cooperative agreement or other agreement or document governing the expenditures of federal funds. A material weakness is a reportable condition in which the design or operation of one or more of the internal control components does not reduce, to a relatively low level, the risk that errors or irregularities, in amounts which would be material to the financial schedules. This is also known as a reportable condition.
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Examples of Audit Findings Due to Inadequate Internal Controls General:

Late submission of financial status reports Timesheet/evaluations not signed or dated

AmeriCorps:
Enrollment/exit of members not in WBRS or not submitted on time Inappropriate documentation for changes made to timesheets

Senior Corps:
FGP: No written improvement plan for students
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Creation and Documentation of Internal Controls through Policies and Procedures

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Policies & Procedures

Documented policies and procedures are important because:
They are the standards for the organizations operations They help in maintaining information that is crucial to operations that would otherwise remain in employees heads They help in orienting new employees and substitutes if the appropriate personnel are absent
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Policies & Procedures

Policies should be established, followed, monitored, updated and reviewed As times change, so does the need for our policies
Example: Internet access to cash accounts and ability to make electronic transfers

Financial and Grants Management Institute - March 18-20, 2008

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Written Policies and Procedures

Assist with consistency and clear communication of expectations:
Policies set expectations: what is to be done Procedures or processes describe how is it to be done Effective ones explain rationale and include examples of principal transactions and completed forms

Financial and Grants Management Institute - March 18-20, 2008

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Examples of Key Items Included in Policies & Procedures

Authorizations of transactions Payroll procedures Cash receipts procedures Procurement policies Travel regulations
Financial reporting Budgeting Record retention Conflict of interest Timekeeping

Specific Policies Governing Federal Funds:

FSR completion Drawdown of federal funds Matching requirements
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Small Group Breakout

Lets Review YOUR Policies

Financial and Grants Management Institute - March 18-20, 2008

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Staff Timesheet - Basic Criteria

Signed and dated by employee or by supervisor Reflect after-the-fact time determination of actual activity Are prepared at least monthly and coincide with one or more pay periods Account for the total activity for which employees are compensated and which is required in fulfillment of their obligations to the organization Provide support for charges for salaries and wages must also be supported by records indicating the total number of hours worked each day in conformance with the Dept. of Labor

Financial and Grants Management Institute - March 18-20, 2008

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In-kind Contribution - Basic Criteria

Document the donors basis for determining value of personal services, material, equipment, building, and land Obtain written acknowledgement from the donor to include:
Date and location of donation Detailed description of item/service Estimated value of contribution, how value was determined, and who made the determination Confirm that the contribution was or was not obtained with federal funds Name and signature of donor
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Job Description - Basic Criteria

Job title: Reports to: Supervises: Basic function: Duties and responsibilities: Qualifications: Classification:
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Accounting Systems - Basic Criteria

System must be capable of:
Distinguishing grant versus non-grant related expenditures Identifying costs by program year Identifying costs by budget category Differentiating between direct and indirect costs (administrative costs)

Maintains federal/non-federal matching funds separately from grant funds Records in-kind contribution as both revenues and expenses
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Chart of Accounts - Basic Criteria

Numerical outline of accounts Narrative description of each line item Note special accounts created to track CNCS specific grant funds

Financial and Grants Management Institute - March 18-20, 2008

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Budgetary Controls - Basic Criteria

Monitoring of budgets to actual year-to-date and current period expenditures or outlays Explaining any budget variations that are unexpected or unusual and determining necessary adjustments Ensuring compliance with laws, regulations, and CNCS provisions, particularly matching percentage requirements Requesting prior approvals for modification, if necessary Assuring budget changes are properly approved Reviewing movements between line items and verifying if they are within provisions and/or guidelines
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Documentation - Basic Criteria

Documentation should ensure that costs:
Conform to grant/contract limitations Are allowable under the budget Are treated consistently Determined in accordance with Generally Accepted Accounting Principles (GAAP)

All documentation should support:

What services or goods were obtained Why the transaction is allowable for the grant purposes The value of the contribution

Financial and Grants Management Institute - March 18-20, 2008

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Documentation Information
Costs need to be:
Allowable Allocable Reasonable and Necessary

Documentation should also reflect that these requirements were met

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Take it Home!
1. 2.
3. 4.

5.

Ensure accountability and transparency Know that internal controls affect every level in all organizations irregardless of size Creation and monitoring of internal controls is a continual process Strong internal controls allow an organization to achieve its goals effectively and efficiently Review current policies and procedures to be sure they will guide you to compliance
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