1. PASBO Conference 3/14/2007 1 School District Business Operations – Efficiencies and Internal Controls Matthew J. Malinowski Business Manager Susquehanna Township School District Laura E. Cowburn, PRSBA Asst. to Supt. for Business Services Columbia Borough School District PASBO Conference 3/15/07

2. PASBO Conference 3/14/2007 2 Introduction Internal controls: – A process effected by the entity’s board, management, and other personnel, designed to provide reasonable assurance regarding the achievement of objective in effectiveness and efficiency of operations, reliability of financial reporting, and compliance with applicable laws and regulations.

3. PASBO Conference 3/14/2007 3 Internal Control Myths an Facts MYTHS Internal control starts with a strong set of policies and procedures Internal control – That’s why we have external/internal auditors. Internal control is a finance thing Internal controls are essentially negative, like a list of “thou- shalt-nots.” Internal controls take time away from our core activities – serving students. FACTS Internal control starts with a strong control environment While external/internal auditors play a key role in the system of control, management is the primary owner of internal control Internal control is integral to every aspect of business Internal control makes the right things happen the first time Internal controls should be built “into,” not “onto” business processes.

4. PASBO Conference 3/14/2007 4 Segregation of Duties Segregation of duties means separating the recordkeeping function from the operational responsibility of that activity and from those who exercise physical control over the records. Categories of duties: – Authorization – Custody – Record keeping – Reconciliation

5. PASBO Conference 3/14/2007 5 State Audit Internal Control Review (sample questions) – Is cash deposited in tact and on a timely basis? – Are checks restrictively endorsed immediately upon receipt? – Are changes in employment, salaries, wage rates, and payroll deductions authorized by the board and the dollar amounts listed in the minutes? – Are employee files maintained by a person independent of payroll processing? – Is the payroll register approved by authorized personnel prior to final processing? – Are invoices checked in the business office against purchase orders and evidence of receipt noted prior to payment? – Are the purchasing and receiving functions separate?

6. PASBO Conference 3/14/2007 6 Assessment Criteria A Balanced Assessment should take into account the following: Significance- The degree of harm that could result Likelihood of Occurrence- What is the probability the a given risk will materialize? Inherent Risk – Where will there always be risk?

7. PASBO Conference 3/14/2007 7 Example of Maintaining the Three Separate Functions Purchasing person issues a purchase order based on a requisition completed beforehand. Person who ordered the item verifies that the goods are received (Sign off on PO copy) Separate Person in the business office issues or authorizes payment.

8. PASBO Conference 3/14/2007 8 Identifying Potential Risks Assertions to ensure that all significant risks are identified in a purchasing cycle: 1) Has a purchase been recorded for goods not yet received? Has a vendor been paid twice? 2) Have purchases been made, but not recorded? 3) Were all purchases properly authorized? 4) Were charges to appropriate accounts?

9. PASBO Conference 3/14/2007 9 Compensating Controls Control related policies to compensate for risks. Examples: – Purchases orders must be approved by department head or other designated official. – Policy to only pay off of an original invoice – Reconcile encumbrances to open purchase orders

10. PASBO Conference 3/14/2007 10 What are you reporting to your board? Treasurers Report on all Cash Balances Special Fund Reports (Food Service, Capital, Special Revenue, Activity) YTD Budget Report Budget Transfers All Tax Exonerations Bill List (Include monthly, emergency, wires)

11. PASBO Conference 3/14/2007 11 Common Types of Public Sector Fraud Payroll Fraud Benefit Fraud Double Payments Charge Off Fraud Disposal Fraud Travel Claim Fraud

12. PASBO Conference 3/14/2007 12 Examples of Internal Controls Budget preparation, monitoring Purchasing/Payroll functions Tax Collection/Reporting Investments Records

13. PASBO Conference 3/14/2007 13 Other Examples Internal Control Components Assessment Factors Risk Evaluation Occupational Fraud and Abuse Quiz – What’s Your Fraud IQ?

14. PASBO Conference 3/14/2007 14 Additional Resources/Information U.S. Government Accountability Office (GOA) – New Edition Yellow Book – http://www.gao.gov/govaud/ybk01.htm download. See pages 81-87. http://www.gao.gov/govaud/ybk01.htm Roslyn School District, New York - http://www.osc.state.ny.us/localgov/audits/2006/scho ols/roslynfoll.pdf (a real life scandal) http://www.osc.state.ny.us/localgov/audits/2006/scho ols/roslynfoll.pdf AICPA - https://antifraud.aicpa.org/Resources/CPA+Services +for+Fraud+Prevention+and+Detection.htm