Financial and Grants Management Institute - March 18-20, 20081 Establishing Internal Controls

Financial and Grants Management Institute - March 18-20, 2008 1

Establishing Internal Controls


Session Objectives

1. Provide an understanding of why an organization should have internal controls and the impact of not having adequate controls

2. Understand the key components of internal controls

3. Work hands on with participants to review examples of various policies

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Nat’l & Community Svc. Act of 1990

Code of Fed. Regulations (CFR)

OMB Circulars (part of CFR)

State & Local Regulations

NOFO

Notice of Grant Award

Provisions

Certifications and Assurances


What are Internal Controls?

• Internal controls are “processes” adopted by an organization’s board, management and other personnel designed to provide reasonable assurance regarding the achievement of:– Effectiveness and efficiency of operations– Reliability of financial reporting– Compliance with laws and regulations


What are Internal Controls?

• System of checks and balances• Protect the organization from financial

abuse and enhance its ability to achieve its goals

• Not a “organizational burden,” it is a way to optimize of resources


Why Have Internal Controls?

• Improve accountability to customers (Federal Government, CNCS, trustees, etc.)

• Help organization achieve performance and budget targets

• Improve reliability of financial reporting• Improve compliance with laws, regulations• Prevent loss of resources, public assets and

public trust


Internal Control Objectives• Adequacy of audit trail

– Can a transaction be traced from the accounting records back to the original documentation (invoice, timesheet)?

• Segregation of duties– Are the various aspects of the accounting functions

separated and performed by more than one person?

• Physical safeguard of assets– Protection of the assets of the organization to ensure

its mission can be carried out

• Adequacy of Records– Are adequate records maintained to provide a proper

trail for the audit


Internal Controls Interrelated Components

• Control environment– What is the atmosphere of the work environment?

• Risk assessment– Is your organization considered low risk or high risk?

• Control activities– What activities provide control within your organization?

• Information and communication– Is information communicated clearly to staff and is there

a means for staff to provide feedback? • Monitoring

– Are the controls monitored and reviewed to ensure that they are appropriate and meeting compliance requirements?


A Good Control Environment Includes:

• Positive “atmosphere” in the work environment• Existence of a code of conduct and code of

ethics• Written job descriptions• Timely communications with board of directors• Written policies to hire, train, promote and

compensate employees• Safeguards for employees related to whistle-

blowing (Sarbanes-Oxley)• A clear chain of command


Elements of Good Internal Controls

• Documented policies and procedures• Adequate review process for financial reports and

budgets• Adequate cash management procedures (e.g.,

monthly bank reconciliations by supervisory personnel)

• Physical safeguarding of assets• System to track participants’ & employees’ activities• System to follow up on problems to ensure resolution


How Can Internal Controls Impact an

Organization?• Potential impacts of insufficient internal

controls: – Audit findings– Federal funds may be managed

inappropriately– Funding sources are jeopardized– Inconsistencies– Inefficient use of time and resources


Audit Findings•Two types of audit findings

– A questioned cost is what is believed to be a violation of a provision of law, regulation, contract, grant, cooperative agreement or other agreement or document governing the expenditures of federal funds.

– A material weakness is a reportable condition in which the design or operation of one or more of the internal control components does not reduce, to a relatively low level, the risk that errors or irregularities, in amounts which would be material to the financial schedules. This is also known as a reportable condition.


Examples of Audit Findings Due to

Inadequate Internal ControlsGeneral:

• Late submission of financial status reports• Timesheet/evaluations not signed or dated

AmeriCorps:• Enrollment/exit of members not in WBRS or not

submitted on time• Inappropriate documentation for changes made

to timesheets

Senior Corps:• FGP: No written improvement plan for students


Creation and Documentation of Internal

Controlsthrough Policies and

Procedures


Policies & Procedures

• Documented policies and procedures are important because:– They are the standards for the organization’s

operations– They help in maintaining information that is

crucial to operations that would otherwise remain in employees’ “heads”

– They help in orienting new employees and substitutes if the appropriate personnel are absent


Policies & Procedures• Policies should be established, followed,

monitored, updated and reviewed• As times change, so does the need for our

policies– Example: Internet access to cash accounts and

ability to make electronic transfers


Written Policies and Procedures

Assist with consistency and clear communication of expectations:– Policies set expectations: “what is to be

done”– Procedures or processes describe “how is it

to be done”– Effective ones explain rationale and include

examples of principal transactions and completed forms


Examples of Key Items Included in Policies &

Procedures– Authorizations of transactions– Payroll procedures– Cash receipts procedures– Procurement policies– Travel regulations

Specific Policies Governing Federal Funds:

– FSR completion– Drawdown of federal funds– Matching requirements

– Financial reporting– Budgeting– Record retention– Conflict of interest– Timekeeping


Small Group Breakout

Let’s Review YOUR Policies


Staff Timesheet - Basic Criteria

• Signed and dated by employee or by supervisor• Reflect after-the-fact time determination of actual

activity• Are prepared at least monthly and coincide with

one or more pay periods• Account for the total activity for which employees

are compensated and which is required in fulfillment of their obligations to the organization

• Provide support for charges for salaries and wages must also be supported by records indicating the total number of hours worked each day in conformance with the Dept. of Labor


In-kind Contribution - Basic Criteria

• Document the donor’s basis for determining value of personal services, material, equipment, building, and land

• Obtain written acknowledgement from the donor to include:– Date and location of donation– Detailed description of item/service– Estimated value of contribution, how value was

determined, and who made the determination– Confirm that the contribution was or was not

obtained with federal funds – Name and signature of donor


Job Description - Basic Criteria

• Job title:• Reports to:• Supervises:• Basic function: • Duties and responsibilities:• Qualifications:• Classification:


Accounting Systems - Basic Criteria

• System must be capable of:– Distinguishing grant versus non-grant

related expenditures– Identifying costs by program year– Identifying costs by budget category– Differentiating between direct and indirect

costs (administrative costs)

• Maintains federal/non-federal matching funds separately from grant funds

• Records in-kind contribution as both revenues and expenses


Chart of Accounts - Basic Criteria

• Numerical outline of accounts• Narrative description of each line item• Note special accounts created to track

CNCS specific grant funds


Budgetary Controls - Basic Criteria

• Monitoring of budgets to actual year-to-date and current period expenditures or outlays

• Explaining any budget variations that are unexpected or unusual and determining necessary adjustments

• Ensuring compliance with laws, regulations, and CNCS provisions, particularly matching percentage requirements

• Requesting prior approvals for modification, if necessary

• Assuring budget changes are properly approved• Reviewing movements between line items and

verifying if they are within provisions and/or guidelines


Documentation - Basic Criteria

Documentation should ensure that costs:• Conform to grant/contract limitations• Are allowable under the budget• Are treated consistently• Determined in accordance with Generally

Accepted Accounting Principles (GAAP)

All documentation should support:• What services or goods were obtained• Why the transaction is allowable for the grant

purposes• The value of the contribution


Documentation Information

• Costs need to be:– Allowable– Allocable– Reasonable and Necessary

• Documentation should also reflect that these requirements were met


Take it Home!1. Ensure accountability and transparency2. Know that internal controls affect every level

in all organizations irregardless of size3. Creation and monitoring of internal controls

is a continual process4. Strong internal controls allow an

organization to achieve its goals effectively and efficiently

5. Review current policies and procedures to be sure they will guide you to compliance

Documents

Financial and Grants Management Institute - March 18-20, 20081 Establishing Internal Controls