Internal Controls. Understanding the Requirements

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Deirdre Thomas
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1 Internal Controls Understanding the Requirements

2 Objectives By the end of this session, you will be able to: Identify requirements associated with internal controls. Gain knowledge to support the program s compliance with Federal regulations. Identify areas in the program where internal controls could be strengthen. 2 2

3 What are Internal Controls? $ $ Internal control: means a process, effected by an entity's management and other personnel, designed to provide reasonable assurance regarding the achievement of objectives in the following categories: (a) Effectiveness and efficiency of operations; (b) Reliability of Financial Reporting; and (c) Compliance with applicable laws and regulations. 3

4 Promote Strong Internal Controls Agencies cannot survive without them. Board and Administrators cannot function adequately without them. Internal Controls keep staff safe and reduce ambiguity about roles and responsibilities Protects grantees most important assets the children. 4

5 STRESS Importance of Internal Controls Internal controls are comprised of systems designed to: Promote compliance with laws, regulations and grant requirements Ensure proper recording of and accounting for transactions Control assets and records to protect against loss, theft or misuse Maintain reliability of financial reporting Support adherence to the agency's policies and procedures Ensure appropriate oversight by the agency's governing body/tribal council Increase effectiveness and efficiency of operations *Definition of internal controls for Federal programs found in OMB A (p) 5 5

6 STRESS Importance of Internal Controls Why are internal controls important? To ensure the proper use of funds Safeguards assets to prevents illegal or unauthorized transactions or acts To strengthen grantee operations Increase efficiency of operations and maximize use of limited resources Provide reliable financial information, allowing managers and governing bodies/tribal councils to make more informed programmatic decisions 6 6

7 What Does Monitoring Ask? 7 7

8 Monitoring Asks FIS1A: Do the program's financial management systems provide for effective control over and accountability for grant funds, property, and other assets and ensure they are used solely for authorized purposes? Regulations: 74.21(b)(3), 92.20(b)(3), 74.21(b)(4), 92.20(b)(4), (b), 230, App B(8)(j) 8

9 Monitoring Asks FIS1F: Has the program addressed or is in the process of addressing any financial findings or weaknesses identified during the grantee s past three OMB Circular A 133 Audits? Regulations 74.26, 92.26

10 Monitoring Asks FIS2B: Are monthly financial status reports provided to program governing bodies, policy groups, and staff to advise them and to control program quality and maintain program accountability? Standards: 642(c)(1)(E)(i), 642(c)(1)(E)(ii), 642(c)(1)(E)(iii), 642(d)(2)(A), 642(c)(1)(E)(iv)(V)(bb) 10 10

11 Monitoring Asks FIS3A: Does the program have a written code or standards of conduct governing the performance of its employees engaged in awarding and administering contracts? Regulations: 74.42, 92.36(b)(3) 11 11

12 Monitoring Asks FIS5A: Has the program implemented procedures to determine allowability, allocability, and reasonableness of costs as required? FOR NONPROFIT ORGANIZATIONS ONLY: Verify that the grantee and delegate have written procedures for determining the allowability, allocability, and reasonableness of costs. Regulations: 74.21(b)(6), 74.28, 92.23(a), 92.20(b)(5), 230, App A(A)(3), 230, App A(A)(3)(a), 230, App A(A)(2)(a), 225, App A(C)(1)(a), 225, App A(C)(1)(b), 225, App A(C)(1)(j), 220, App A(C)(2), 220, App A(C)(4)(a), 230, App A(A)(2)(g), 220, App A(C)(3)

13 Monitoring Asks Program Design and Management Compliance Framework #1 Program Governance: Structure The grantee ensures program integrity and oversight of quality services to children and families and supports appropriate decisions related to program design and implementation by establishing and maintaining formal and effective program governance

14 Monitoring Asks PDM1.1: The grantee has a governing body composed of: At least 1 member with background and expertise in accounting or fiscal management. At least 1 member with background and expertise in early childhood education and development. At least 1 member who is a licensed attorney Additional members who reflect the community and include parents of formerly or currently enrolled Head Start/EHS children and Other members selected for their expertise in education, business administration or community affairs. 642(c)(1)(B)(i), 642(c)(1)(B)(ii), 642(c)(1)(B)(iii), 642(c)(1)(B)(iv), 642(c)(1)(B)(vi)

15 Monitoring Asks Program Design and Management Compliance Framework #2 Program Governance: Policies and Training The grantee ensures that the Governing Body and Policy Council (or Policy Committee) maintain policies regarding conflict of interest, compensation and reimbursement and receive appropriate training and technical assistance to support program oversight and decision making

16 Monitoring Asks PDM2.3: Members of the Governing Board and Policy Council are free from financial or other conflict of interest with the Head Start/Early Head Start agency and do not receive compensation for serving on these bodies. 642(c)(2)(C)(i), 642(c)(2)(C)(ii), 642(c)(3)(B), (b)(6), 642(c)(1)(C)(i), 642(c)(1)(C)(ii), 642(c)(1)(C)(iii), 642(c)(1)(C)(iv), 642(c)(1)(E)(iv)(X)(aa)

17 Monitoring Findings Related to Internal Controls Top cited issues related to internal controls in FY (YTD) Reporting to the governing body and Policy Council (PDM) Ongoing monitoring of grantee operations and delegates (PDM) Governing body responsibilities (PDM) Code of Conduct (PDM) Allowable non Federal share costs (FIS) Financial Management Systems (FIS) 17 17

18 Monitoring Findings: Your Thoughts? Looking at the monitoring data Are you surprised by the issues that are top cited in monitoring? Are there issues you know your agency struggle with that are not reflected in the monitoring data? 18 18

19 Requirements Associated with Internal Controls 19 19

20 Requirements: Internal Controls HS Act Sect 642(c) Program Governance Upon receiving designation as a Head Start agency, the agency shall establish and maintain a formal structure for program governance, for the oversight of quality services for Head Start children and families and for making decisions related to program design and implementation. HS Act Sect 642(d) Program Governance Administration (1) Meaningful consultation and collaboration about decisions of the governing body and policy council. (2) Sharing of accurate and regular information for use by the governing body and the policy council, about program planning, policies, and Head Start agency operations 20

21 Requirements: Internal Controls (g)(1) (2) (g) Governing body responsibilities. (1) Grantee and delegate agencies must have written policies that define the roles and responsibilities of the governing body members and that inform them of the management procedures and functions necessary to implement a high quality program. (2) Grantee and delegate agencies must ensure that appropriate internal controls are established and implemented to safeguard Federal funds in accordance with 45 CFR

22 Requirements: Internal Controls Financial Management Systems must include: 45 CFR 74.21(b) and 92.20(b) Financial reporting Accurate, current, and complete disclosure of the financial results of financially assisted activities... Accounting records Maintain adequate records... Internal control Effective control and accountability must be maintained for all grant and subgrant cash, real and personal property, and other assets... Budget control Actual expenditures or outlays must be compared with budgeted amounts for each grant or subgrant... Allowable cost. Source documentation. Cash management Minimizing the time elapsing between the transfer of funds from the U.S. Treasury and disbursement by grantees and subgrantees 22 22

23 Other Requirements: Internal Controls OMB A 110 Subpart C Post Award Requirements Recipients financial management systems shall provide for the following: (1) Accurate, current and complete disclosure of the financial results of each federally sponsored project or program. (2) Records that identify adequately the source and application of funds for federally sponsored activities. (3) Effective control over and accountability for all funds, property and other assets. (4) Comparison of outlays with budget amounts for each award. (5) Written procedures to minimize the time elapsing between the transfer of funds. (6) Assuring reasonableness, allocability and allowability of costs in accordance with the provisions of the applicable Federal cost principles and the terms and conditions of the award. (7) Accounting records including cost accounting records that are supported by source documents

24 Key Aspect of Internal Controls Segregation of Duties 24

25 The Basics of Segregation of Duties Within a sequence of operations for a specific procedure (e.g., cash disbursement) no financial transaction is handled by one person, for example: Operating employees duties should be segregated from accounting employees duties All employees involved should have clearly defined roles Proofs, checks, sign offs and other security measures should be used 25 25

26 Segregation of Duties Guidance Segregation of duties in small organizations: Small organizations may have difficulties segregating employee duties due to small staff size Such organizations should carefully develop internal control techniques and procedures with the advice of their financial council and/or auditor 26 26

27 Key Aspect of Internal Controls Reliability of Financial Reporting 27

28 The Basics of Financial Reporting Reporting: Allows for informed decision making and active involvement Is necessary for monitoring financial expenditures and program operations Identifies potential risks Accurate and timely reports are only possible when a strong record keeping system exists Provides checks and balances by keeping everyone in the loop Increases accountability 28 28

the reports must know: How to interpret the information provided How to apply to the information to their

29 The Basics of Financial Reporting Reporting is most effective when: Reports: Provide accurate information and sufficient detail Are presented in an easy to interpret way Are presented in a timely manner Individuals receiving the reports must know: How to interpret the information provided How to apply to the information to their responsibilities What critical questions to ask about the information How to use the information to identify red flags or problem areas 29 29

30 The Basics of Financial Reporting Financial Report Content For reports to be meaningful, they must include: Budget to actual comparisons Non Federal share reporting Administrative cost reporting (Functional Allocation) Breakouts by cost categories, as reflected on the FAA Reporting of any one time funding for which the Head Start agency is accountable (e.g. one time money for buildings, vehicles) Financial Monitoring Activities; Translations, when necessary For programs with Board/PC members whose preferred or primary language is a language other than English. 30

31 The Basics of Financial Reporting Governing Body/Tribal Council and Policy Council need to understand the content of the reports. CFO should make themselves available to the Board and Policy Council. To act as a resource. To foster understanding of the role and importance of accounting and budgeting. 31

critically and ask questions Discuss the implications of the numbers Tie the

32 The Basics of Financial Reporting Staff, Governing Body/Tribal Council members, and Policy Council members need to have TIME to: Digest information in reports Think critically and ask questions Discuss the implications of the numbers Tie the information in the reports back to the bigger picture (program goals, objectives and overall operation) 32

33 REMEMBER Having internal controls including segregation of duties is required. Knowing if they are being implemented is also required. QUESTION What are some agency weaknesses in internal controls that present major risks? 33

34 Perry Davis, Finance/Management Specialist E mail Address: pd11441h@aol.com NATIONAL CENTER on Program Management and Fiscal Operations

35 For more information: This document was prepared under Grant #90HC0004 for the U.S. Department of Health and Human Services, Administration for Children and Families, Office of Head Start, by the National Center on Program Management and Fiscal hslc/tta-system/operations PMFOinfo4u@aed.org NC-4-PMFO

CROSSWALK OF FINANCIAL MANAGEMENT STANDARDS

CROSSWALK OF FINANCIAL MANAGEMENT STANDARDS 24 CFR Part 84 Grants and Agreements with Institutions of Higher Education, Hospitals, and Other Non-Profit Organizations and 24 CFR Part 85 Administrative Requirements