Internal Controls and Prepaid Student Accounts

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1 Internal Controls and Prepaid Student Accounts Ryan Preston Director of Audit Services State Board of Accounts Common Federal Finding found in School audit reports: Condition An effective internal control system was not in place at the School Corporation to ensure compliance with requirements related to the grant agreement and all compliance requirements. Criteria 2 CFR states in part: The non-federal entity must: (a) Establish and maintain effective internal control over the Federal award that provides reasonable assurance that the non-federal entity is managing the Federal award in compliance with Federal statutes, regulations, and the terms and conditions of the Federal award. These internal controls should be in compliance with guidance in Standards for Internal Control in the Federal Government issued by the Comptroller General of the United States or the Internal Control Integrated Framework, issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) Common Federal Finding found in School audit reports: (continued) Effect The failure to establish an effective internal control system placed the School Corporation at risk of noncompliance with the grant agreement and the compliance requirements. A lack of segregation of duties within an internal control system could have also allowed noncompliance with compliance requirements and allowed the misuse and mismanagement of federal funds and assets by not having proper oversight, reviews, and approvals over the activities of the programs. Recommendation We recommended that the School Corporation s management establish controls, including segregation of duties, related to the grant agreement and compliance requirements. 1

2 Definition of Internal Control: Internal control is a conceptual process that is applied to a wide range of situations in a wide range of environments. The purpose of the internal control process is to provide reasonable assurance that the mission and objectives of an organization will be achieved. This purpose includes the reduction of risk associated with fraud as well as a safeguard of resources against loss due to waste, abuse, mismanagement, or errors. Internal control provides a check and balance system over operations, promoting operational effectiveness and efficiency. A system of sufficient internal control produces reliable financial and management data; ensures accuracy and timeliness in reporting; and promotes compliance with laws. Five Components of an Internal Control System: Control Environment Risk Assessment Control Activities Information and Communication Monitoring Activities Risk Assessment Risk is the possibility that an event will occur and adversely affect the achievement of objectives. Risk assessment is the process used to identify and assess internal and external risks to the achievement of objectives, and then establish risk tolerances. Areas of Risk for School Nutrition Programs??? Compliance Fraud 2

3 Control Activities Control activities are the actions and tools established through policies and procedures that help to detect, prevent, or reduce the identified risks that interfere with the achievement of objectives. Control Activities for School Nutrition Program??? Compliance Reporting Common Finding - The School Lunch Director prepared and submitted the Sponsor Claim (claims for reimbursement), the School Food Authority (SFA) Verification Collection Reports, and the Annual Financial Report; however, there was no control in place to ensure that the reports were correct. Fraud Collections Problem Skimming or Theft Monitoring Activities Evaluations are used to determine whether each of the five components of internal control is present and functioning. These evaluations may be conducted on an ongoing or periodic basis. Monitoring Activities for a School Nutrition Program??? Compliance Common Finding - The School Corporation had a control established to ensure the verification of applications and the reviews conducted by the Food Service Director were accurate and correct; however, the control was not implemented on a consistent basis. Fraud Documentation of Internal Control System: Documentation is a necessary part of effective internal control. Documentation relates internal control procedures to the missions and objectives of the unit, solidifies expectations, and provides an effective way to communicate the process. Controls put in place need to be documented and then the process of carrying them out need to be documented as well. Documentation is necessary for the SBOA to determine if the components of the Internal Control System are sufficient. 3

4 2016 STATUTORIAL REQUIREMENTS FOR INTERNAL CONTROL STANDARDS IC (g) After June 30, 2016, the legislative body of a political subdivision shall ensure that: (1) the internal control standards and procedures developed under subsection (e) are adopted by the political subdivision; and (2) personnel receive training concerning the internal control standards and procedures adopted by the political subdivision. Training provided by SBOA Uniform Internal Control Standards for Indiana Political Subdivisions Internal Control webinar video Live presentations given by SBOA personnel Common Audit Result and Comment: PREPAID SCHOOL LUNCH ACCOUNTS The entire amount of student prepaid food advance deposits were recognized in the School Lunch fund, Fund 800. The School Corporation had not established Fund Prepaid Food to account for advance deposits made to individual student prepaid food accounts. Fund Prepaid Food is a trust account where monies are initially deposited on behalf of individual students. Monies are intended to remain in the trust account until they are spent on food purchases. Monies are to be transferred from Fund Prepaid Food to Fund School Lunch to account for actual monies spent by students on food purchases. Our opinion is that money a student puts into their individual meal account should not be considered income to the child nutrition program until that student goes through the lunch line and charges a meal to their account. Therefore, while it is in the student's individual account the balance should not be included in Fund 800 School Lunch. Our recommendation is that you set up a clearing account with the fund number of Our suggestion is when a student brings in a deposit the receipt would be recorded to fund 8400 using receipt account number Periodically, after the student has charged meals, you should disburse the amount charged from 8400 using expenditure account and receipt it into fund 800 using receipts accounts At this point it is considered program income and should be included on any reports that are required to be completed. Also, on a monthly basis that balance of the 8400 fund should be reconciled with the total of the individual meal accounts. (The School Administrator and Uniform Compliance Guidelines, September 2015) Receipt would be posted to Prepaid Lunch fund on for $ Money transferred as disbursements would be posted to Prepaid Lunch fund on for $53.00 Receipt would be posted to School Lunch fund on for $

5 Student Prepaid Accounts with zero or negative balances: September 2015 School Bulletin Along with recording student meal deposits properly, we have been discussing the need of the school board to set a policy that would dictate how situations are treated when it comes to student meal accounts. The school board should adopt a policy if they want to allow accounts to be able to accrue negative balances, to be written off at any point, what the process is for collecting balances owed, etc. We will audit to the policy set by the school board, but in the absence of a policy we will audit to the requirements noted in Chapter 9 of the Accounting and Uniform Compliance Guidelines Manual for Indiana School Corporations. SBOA School Compliance Guidelines Manual Chapter 1 Collection of Amounts Due Units have a responsibility to collect amounts owed to the unit pursuant to procedures authorized by law. Bad Debt and Uncollectible Accounts The governing body of a unit must have a written policy concerning a procedure for the writing off of bad debts, uncollectible accounts receivable, or any adjustments to record balance. Documentation must exist for all efforts made by the unit to collect amounts owed prior to any write-offs. Write-offs or adjustments to records which are not documented or warranted may be the personal obligation of the responsible official or employee. Federal and State Agencies-Compliance Requirements Units are required to comply with all grant agreements, rules, regulations, bulletins, directives, letters, letter rulings, court decisions, and filing requirements concerning reports and other procedural matters of federal and state agencies. Units must file accurate reports required by federal and state agencies. Noncompliance may require corrective action. 5

6 USDA Memo SP On July 8, 2016, the USDA issued Memo providing requirements and guidance for school food authorities (SFA) to institute and communicate a meal charge policy. The memo states, Because all students in participating schools may receive reimbursable meals, all SFAs must have a policy in place for children who are participating at the reduced or paid rate, but either do not have money in their account or in hand to cover the cost of the meal at the time of service. It is required that students and their parents or guardians must be informed about how students who pay the full or reduced price cost of a reimbursable meal are impacted by having insufficient funds on hand or in their account to purchase a meal. The memo includes a deadline of July 1, 2017 for all SFAs to have established and communicated their written meal charge policy. The memo provides guidelines for what can be included in the meal charge policy: (1) allowing students to charge all types of available reimbursable meals; (2) offering alternate meals; (3) impose a limit on charges; (4) allow neither meal charges nor offer alternate meals. School also have the ability to make the meal charge policy throughout the entire School Corporation or it can vary based on student grade levels. In addition to including situations when a meal is charged, the policy must include the steps taken for collecting delinquent meal charge debt, if allowed. USDA Memo SP On July 8, 2016, the USDA issued Memo clarifying the processes of designating delinquent debt that has been determined to be uncollectable as bad debt and obtaining assistance to offset bad debt losses. The memo defines delinquent debt as debt that is considered collectable and efforts are being made to collect it. Since, the amount owed is still considered collectable, then it should remain part of the Prepaid School Lunch fund (8400). The memo allows for delinquent debt to be carried over from school year to school year. It also, states that SFAs must make a reasonable effort to collect delinquent debts and expenses incurred while attempting to collect are allowable uses of the School Nutrition Program grant. The memo defines bad debt as debts which have been determined to be uncollectable. It goes on to say once amounts are classified as bad debts that they must be written off and taken as an operating loss. 2 CFR states, Bad debts (debts which have been determined to be uncollectable), including losses (whether actual or estimated) arising from uncollectable accounts and other claims, are unallowable. Related collection costs, and related legal costs, arising from such debts after they have been determined to be uncollectable are also unallowable. Therefore, School Nutrition Program grant funds cannot be used cover the costs of writing off bad debt. The operating loss must be absorbed by using non-federal funds. Transfers to the Prepaid School Lunch fund (8400) to cover bad debts may be made from the General fund (100), special funding from State or Local grants, funding received from school or community organizations, or other donations. USDA Memo SP Question and Answer Guidance for unpaid meal charges #11. If a child graduates or moves to a new school district, may the SFA use funds remaining in the child s account to cover meal charge debt accrued by other students? When a child leaves the district or graduates, SFAs must attempt to contact the child s household to return any funds remaining in the student s account. However, SFAs may encourage families that are not approved for free or reduced price meals to donate the funds remaining in their account rather than receiving a refund when their child leaves the school. These funds could be used to cover unpaid meal charges that were uncollectable. 6

7 CONTACT INFORMATION Ryan Preston and Chase Lenon (317)