SBO/CFO/Entity requests DOE/Federal Government Audit Reports Insurance Fraud cases 4/12/2016

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1 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 1

2 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. 2

3 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

4 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

5 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 $34, , , , , , Year Number of Claims Dollars of Loss $217, $52, , , , , , ,919, ,

6 Year Number of Claims Dollars of Loss $183, $107, $ 96, $ 24, 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 17 Greater accuracy Find errors quickly Deter mismanagement/fraud Provide checks & balances Protect DISTRICT and SBO/CFO! 6

7 Access (to Assets) Authorization Accounting 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 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 Creating or maintaining records, such as cash receipts, requisitions Maintaining inventory records 19 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 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. 7

8 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 Pam Bormann Andy Nielsen Mary Babinet Organization/School District Iowa State Auditor s Office 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 8

9 PETTY CASH, CASH IN BANK, INVESTMENTS Access Authorization SEGREGATION OF DUTIES MODEL ONE PERSON OFFICE DUTY SBO OUTSIDE BUSINESS OFFICE Initiates request to open/close bank/investment accounts and public depositories Approves/signs off on opening/closing of bank/investment accounts and public depositories X NON- DISTRICT EMPLOYEE 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 Authorization Initiates request to open/close bank/ investment accounts and public depositories Approves/signs off on opening/closing bank/investment accounts and public depositories X X Board PETTY CASH, CASH IN BANK, INVESTMENTS SEGREGATION OF DUTIES MODEL THREE PERSON OFFICE Access Authorization DUTY SBO PERSON 2 Initiates request to open/close bank/investment accounts and public depositories Approves/signs off on opening/closing bank/investment accounts and public depositories X PERSON 3 OUTSIDE BUSINESS OFFICE NON- DISTRICT EMPLOYEE X Board 9

10 Size of Business Office One Person Two Person Three Person Examples SBO Person 2 Person 3 Outside Business Office Non- District Employee X X X X X X X X X X 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 10

11 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! 11

12 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 12

13 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. 38 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 13

14 Contact IASBO Assistant Director, Nancy Blow at: to purchase and mail you a booklet ($10) or to PDF you a copy at no cost! Thanks!! pschroeder@ia-sb.org 14