Internal ControlsFMC September 2015

IntroductionInternal Controls and the BCR/CAFRGreen BookCurrent StateVision for the Future

Agenda

SAO is responsible for compiling the BCR/CAFRHowever, the data in the BCR/CAFR is comprised

of agency information TeamWorks data Trial Balance shells for non-TeamWorks agencies Year-end reporting forms

Controls are needed to ensure BCR/CAFR is completed accurately SAO needs to know that controls are in place at each

organization such that an accurate BCR/CAFR can be produced

Internal Controls and the BCR/CAFR

Very complex process to compile the BCR/CAFR FY 2014 Based on information received from

agencies and other sources SAO:• Prepared 387 trial balances• Received ~1,600 year-end forms and trial

balances from agencies• Posted 1,730 journal entries with ~11,000

lines of data

Internal Controls and the BCR/CAFR

From COSO to Green Book

COSO Green Book

Standards for Internal Control – The “Green Book”

Federal Level Reflects federal internal control standards

required per Federal Managers’ Financial Integrity Act (FMFIA)

Serves as a base for OMB Circular A-123 Written for government

• Leverages the COSO Framework• Uses government terms

What’s in Green Book?

State Level May be an acceptable framework for internal

control on the state and local government level under OMB Uniform Guidance for Federal Awards

Written for government• Leverages the COSO Framework• Uses government terms

What’s in Green Book?

Auditor Level Provides standards for management Provides criteria for auditors Can be used in conjunction with other standards,

e.g. Yellow Book

What’s in Green Book?

The Green Book

Core definition of internal controlThree categories of objectives and five components of internal controlEach of the five components of internal control are required for effective internal controlImportant role of judgment in designing, implementing and operating an internal control system and evaluating its effectiveness

Fundamental concepts underlying five components articulated as principlesConsideration given to operations, compliance, and non-financial reporting objectives

Internal control is defined as a “process, effected by an entity’s oversight body, management, and other personnel, designed to provide reasonable assurance that the objectives of an entity will be achieved.”a) Objectives are definedb) Controls are designedc) Controls are in placed) Objectives are achieved

An internal control system is defined as a “continuous built-in component of operations, effected by people that provides reasonable assurance, not absolute assurance, that an entity’s objectives will be achieved.”

Fundamental Concepts of Internal Control

• Relationship of Objectives and Components• Direct relationship between objectives (which are what an entity

strives to achieve) and the components (which represent what is needed to achieve the objectives)

• COSO depicts the relationshipin the form of a cube:

• The three objectives are represented by the columns

• The five components are represented by the rows

• The entity’s organization structure isrepresented by the third dimension

The COSO Framework

Source: COSO

Green Book –Component, Principle, Attribute

Revised Green Book: 5 Components and 17 Principles

If management determines a principle is not relevant, management supports that determination with documentation that includes the rationale of how, in the absence of that principle, the associated component could be designed, implemented, and operated effectively.

Consider cost/benefit

Documentation Requirements

Where are we now?Where do we go from here?

The state has opportunities to improve the internal controls oversight relative to financial reporting, federal compliance, and financial operations across the enterprise.

Decentralized without enterprise level guidance and oversight.

Potential lack of sufficient documentation of risks and controls and/or documentation prepared by the auditors.

Current State

Redefine the statewide internal control program Identify the common framework (Green Book) Update standards and policies Provide communication and training to agencies Provide necessary support to agencies related to

risk assessments Compliance monitoring

Future in Georgia

1) Financial Reporting2) Federal Compliance3) Financial Operations

Agency management needs to ensure they understand and assess the risks and ensure they have appropriate and sufficient internal controls

Future in Georgia

Agency Head Responsibilities

Going forward, the head of each executive agency will certify annually that the agency head has reviewed the agency’s internal control systems, and that these systems are in compliance with standards and policies established by SAO.

Reactions

ShockResistanceDelay

For BCR/CAFR reporting, are controls in place for management to know: Are capital asset balances correct (beginning balances, CY additions,

CY deductions) and are they in the right category (building, infrastructure, etc.)?

Are all leases included in the form? Do they contain the right FMV amounts?

Have all estimates of uncollectible receivables been provided on the allowance for doubtful accounts forms?

Have all revenues and expenditures/expenses been recorded properly (per applicable basis of accounting) and posted to the correct G/L account?

Have all significant commitments and notification of significant subsequent events been provided to SAO?

Controls around Financial Reporting Process

For BCR/CAFR reporting, are controls in place for management to know (continued): Are items reported correct by fund (Budget Fund, Capital Projects

Fund, Revenue Collections Fund, Agency Fund, etc.)? Have all accruals of revenue based on encumbrances been reported

properly? Is the classification of funding sources used for GAAP reporting of

fund balances correct (nonspendable, committed, restricted, assigned, unassigned)?

Have all cash and investments been reported properly on the Cash and Deposit form?

Are all Receivables and Payables to/from organizations within the State reported correctly on the Interorganzation Transactions form?

Controls around Financial Reporting Process

Cash example

Fund example

Fund source & Form example

Lease example

Lease example

The Yellow Book is available on GAO’s website at:www.gao.gov/yellowbook

The Green Book is available on GAO’s website at:www.gao.gov/greenbook

For technical assistance, contact information as follows:

yellowbook@gao.gov or greenbook@gao.govor call (202) 512-9535

Where to Find Information