Internal Controls: What Every Elected Official Should Know Tuesday, April 8, 2008 William D. McKain,...

Internal Controls:

What Every Elected Official Should Know

Tuesday, April 8, 2008

William D. McKain, CPAFinance Director – Mt. Lebanon

Internal Controls: What Every Elected official Should Know

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Why do you need good internal controls? Fraud, abuse, theft and misappropriations of

funds can come from a variety of perpetrators including but not limited to employees, officers, volunteers and vendors.


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Why do you need good internal controls? Despite an increase in focus on internal controls

over the past few years, a survey by KPMG still found poor internal control procedures to be the top factor behind corporate fraud.

The KPMG survey, which poled 138 high-level executives, found 42 percent of respondents identified unsatisfactory controls.

Other factors included employee/third-party collusion (35 percent) and management overruling of internal controls (25 percent).

Source: Pennsylvania CPA Journal, Spring 2008


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What is the risk of poor internal controls? Risk assessment is the identification and analysis

of relevant risks to the achievement of an organization's objectives, for the purpose of determining how those risks should be managed.

Risk assessment begins with an initial determination of operating objectives, followed by a systematic identification of those things that could prevent each objective from being attained. In other words, it's an analysis of what could go wrong.


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What is the risk of poor internal controls? Not all risks are equal. Some are more likely than

others to occur, and some will have a greater impact if they occur. Once risks are identified, their probability and significance must be assessed.

Finally, having identified and assessed risk, management must decide how to deal with it.


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Mt. Lebanon Approach to Internal Control Risk Mt. Lebanon takes very seriously its

responsibilities for adopting sound accounting policies, establishing and maintaining internal controls, and preventing and detecting fraud.

We believe all municipal employees must be good stewards of municipal assets and continually develop and monitor controls to safeguard these assets.

Our internal control risk assessment process provided an opportunity to examine, document and measure our controls.


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Internal Control Elements The starting point for any organization to assess

its risks is to examine its current internal control structure and its effectiveness. An effective and comprehensive internal control structure must encompass the following five elements.1. Control environment2. Control related policies and procedures3. Information and communication4. Monitoring5. Continuing assessment of risk


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Internal Control Elements1. Control Environment - compliance

Management & leadership set the correct tone by believing internal control is important to achieving our goals, and communicates that view to employees at all levels.

This commitment includes an ongoing investment of time, effort and resources. Our belief is that an effective internal control structure is an integral part of the process of providing high level of services to citizens.


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Internal Control Elements2. Control Related Policies and Procedures - compliance

The finance department has developed a comprehensive listing of financial policies and procedures to: Ensure ongoing fiscal stability. Improve the organization’s processes. Serve as a key element of sound fiscal administration. Provide guidance and be decision points for staff. Identify acceptable and unacceptable courses of action

in which departments (and for that matter governments) can operate.

Allow for consistency despite board/staff turnover.

THIS IS A KEY TO INTERNAL CONTROL RISK ASSESSMENTTHAT BECOMES AN INTEGRAL PART OF THE PROCESS!


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Why have financial policies? When financial polices are effective and enforced

– they preserve and even enhance the fiscal health of governments.

By contrast, weak financial polices promote fiscal instability, cause internal control violations, invite fraud and reduce the trust and confidence citizens have in our government.


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Why have financial policies? The Government Finance Officers Association

(GFOA) has identified polices as a recommended practice.

Your external auditor’s love them.

Take a step back and think about it – doesn’t it make sense to have written financial policies?


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Formal vs. Informal Financial Policies Formal financial polices are those written into

an authoritative document.

Informal financial polices are those that evolve over time based on past practice.


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Formal vs. Informal Financial Policies Informal financial policies may be important for

short-term decisions and the beginning of a more formal structure but there are disadvantages of relying on them:

They can be vague and result in inconsistent application.

They might not stand the test of time. Past practices may not adequately assist in

addressing new situations that arise. Staff turnover could affect the interpretation of an

informal policy. They may or may not have the support of

management and could be abandoned during times of financial stress.


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Formal vs. Informal Financial Policies Formal financial policies have many advantages

over informal polices:

Increase efficiency by standardizing operations ~ don’t have to reinvent responses to circumstances.

These polices most likely outlive their originator which promote stability and continuity ~ provides a common set of rules for all to follow.

Bond rating agencies love them ~ rating agencies look favorably on formal policies such as a debt policy as they render their bond rating.

They Educate Officials ~ they provide a roadmap to help inform public officials of sound financial practice making it more likely these practices will be followed.


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Why should government leadership support financial policies? They offer guidance to new staff and board

members especially those not familiar with a government’s finances.

They serve as ongoing context for management decisions which provides consistency and quality control.

They strengthen an organization during times of financial difficulty because guidelines are set to control debt, limit spending and increase revenues.


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Enforce the Financial Policies Finance Directors and their staff see daily financial

transactions that are impacted by financial policies and therefore are in the best position to enforce the policies.

Violations of policy should be addressed immediately with appropriate staff and supervisors.

If the policy and procedures were thorough and clear the process should work.

The “golden rule”.


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Internal Control Elements3. Information and Communication –

compliance

Internal controls and financial polices and procedures are communicated in various ways. Policies are formal and in writing and may be communicated at weekly director staff meetings, separate staff training, by e-mail and are always posted on the internal municipal website for easy employee access.


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Internal Control Elements4. Monitoring - compliance

It is the responsibility of all municipal employees to adhere and enforce our adopted financial policies. The Finance Director and staff see daily financial transactions that are impacted by financial policies and therefore are in the best position to enforce the policies.

In addition, Mt. Lebanon finance director conducts internal audits on a wide-variety of municipal functions and processes. These audits often measure compliance to existing polices and procedures and sometimes result in new polices based on the findings and recommendations of these reports.


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Internal Control Elements5. Continuing assessment of risk – compliance

We measure and monitor our risks on an on-going basis in a variety of ways. The following are key methods of assessment:

Daily processing of financial transactions through the finance department is a constant and effective tool to enforce, monitor and gauge the effectiveness of current policies.

In August 2004, Mt. Lebanon adopted a Fraud Policy which is communicated to all employees. This policy and related procedures for the reporting, investigation, and resolution of fiscal irregularities are established as an integral part of Mt. Lebanon’s efforts to ensure that all employees conduct themselves in accordance with high ethical standards and our performance with respect to these matters is consistently applied.


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Internal Control ElementsContinuing assessment of risk – compliance (continued)

We measure and monitor our risks on an on-going basis in a variety of ways. The following are key methods of assessment:

Internal audits and associated findings and recommendations are conducted by the finance director to:

a. Strengthen internal controls.b. Enforce current policies.c. Obtain information to develop new policies or

revise existing ones.d. Monitor the controls of your organization.e. Be a deterrent to fraud.f. Identify and catch fraud.


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Internal Control ElementsContinuing Assessment of Risk – compliance

(continued) We measure and monitor our risks on an on-going basis in a variety of ways. The following are key methods of assessment:

Periodic review of current polices is on going to ensure they stay current and remain effective.

New problems, issues or events can be identified to determine whether a new policy is necessary to ensure internal controls are adequate, and that the integrity of data in the accounting systems and assets are protected against loss and abuse.


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Internal Controls Risk Assessment Philosophy & Conclusion We all have a special duty to the public to ensure

that a government’s resources are properly managed. Good management requires the maintenance of sound internal controls to protect all municipal resources.

We recognize that management is primarily responsible for designing, implementing, monitoring and reporting on controls and effective internal controls continues to be a top management priority.


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Internal Controls Risk Assessment Philosophy & Conclusion Internal controls are essential but not foolproof – costs

should not exceed benefits and no control structure can absolutely prevent all fraud, abuse and irregularities.

Our approach is to establish sound policies, efficient procedures and continually strengthen controls that reduce these risks. We believe our control structure is a deterrent to fraud and losses and increases the likelihood of detecting irregularities.

We will continue to develop and monitor internal controls to safeguard our assets and ensure they are utilized in the most effective and efficient manner.


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Internal Controls Risk Assessment Philosophy & Conclusion Mt. Lebanon acknowledges the risk assessment

process is an ongoing one. Internal and external threats constantly develop, presenting new hazards to our government. Change itself is a risk, and we know we must continually adapt our policies and procedures to manage the changing risks to an appropriate comfort level.

It is important to take lessons learned each year and apply them to the preparation of each subsequent audit in order to make better risk assessments and develop responses to identify risks.


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Internal Controls Risk Assessment Philosophy & Conclusion Now more than ever, citizens are demanding the

very highest level of accountability from government employees & officials for their stewardship of public resources.

We need to accept and embrace the challenge to protect, properly manage and be accountable for the resources in our care. Effective internal controls strongly contribute to this objective.


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Conclusion Thank You!

Questions?

Internal Controls: What Every Elected Official Should Know Tuesday, April 8, 2008 William D. McKain,...

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