Kuali Financial Systems – Financial Administrator Development Series – October 2006 Risks, Controls, & Ethics INDIANA UNIVERSITY Financial Administrator

Kuali Financial Systems – Financial Administrator Development Series – October 2006

Risks, Controls, & Ethics

INDIANA UNIVERSITY

Financial Administrator Development Series


Session Objectives

• Understand and apply INTERNAL CONTROL concepts to accomplish your organization’s objectives

• RISK Assessment and Management

• ETHICAL VALUES and CONDUCT


What are Internal Controls and why should I care ?


Why should you care?

Internal Controls minimize the RISKS to your Organization!!!


RISKS your Organization faces

• Financial Reporting• Compliance• Operational• Loss of Assets


Why should you care?

IT’S YOUR JOB TO CARE


Financial Institutional Policy I-1

Role of Fiscal Administrator, Account Manager, and Account Supervisor.

• Account Supervisor has a leadership or executive role.

• Account Manager has an operational role.

• Fiscal Officer has an oversight role.


It’s your Job

Financial Institutional Policy I-1“…trained and hired for the purpose of

providing fiscal, policy, and internal control management of all funds...”

“…responsible for ensuring that processes and related controls have been established to achieve the mission and objectives of their organization(s). “


What is Internal Control

Internal control is a PROCESS of specific policies and procedures designed to provide reasonable assurance that organization’s objectives will be met

– Provide reliable financial reporting– Promote efficient and effective operations – Helps ensure compliance with policy– Protect University Assets


Control Environment

TONE AT THE TOP– Integrity, ethical values, and behavior of

management– Management’s control consciousness– Management’s commitment to competence

It’s the way you do Business– Organization structure– Assignment of authority and responsibility– Policies and practices


What do we mean by “Tone at the Top” ?

• Promote ethical values & conduct

• Walk the walk• Lead by example• Be approachable• Compliance w/Policy• Don’t circumvent rules

• Full disclosure• Fix problems• Equal treatment for

equal offenses• Reward things that

are done right• Hug your Auditor


Questions

• Which attributes of a Super Fiscal Officer can be useful in exhibiting a strong “Tone at the top”?

• When should you be demonstrating a strong “Tone at the top”?


What are Ethics?


Defining Ethics?

eth·ic Pronunciation: 'e-thik Function: noun from Greek Éthos, Date: 14th century

1 the discipline dealing with what is good and bad and with moral duty and obligation2 a: a set of moral principles or values b : the principles of conduct governing an individual or a group <professional ethics>


Defining Ethics?

”Doing the right thing”


What’s the Right Thing?

“What are the Rules”


Ethical Rules?

• Is it legal and in compliance with IU policy?

• Is it fair? – Honest, truthful, responsible,

trustworthy, respect individual

• Would it pass the newspaper test (or the Mom test)?


Why Ethics are important to your Organization?

Responsibility

Regulatory requirements

Return on integrity (the other ROI)


Return on integrity (the other ROI)

Good Ethics = Good Business– Better employee decision making– Greater employee commitment to the

organization– Reduced unethical or illegal behavior– Better work environment– Better reputation and image for IU


ETHICS

Closing Thoughts


• Speak out!

• Be outraged!

• Silence implies your consent!!

Silence is NOT Golden


Important to talk

• Transparency

• Get other perspectives/input

• Hopefully Consensus


Who you going to call?

• Supervisor• Human Resources• Purchasing• Accounting• University Legal Counsel• Internal Audit• Police


Causes of Ethical Failures

1. NO “Tone at the Top”

2. NO Consistency

3. Train Wrecks

4. Fear of Retaliation

5. No Reporting Mechanisms

6. No Education, Communication or Tools


QUESTION

What specifically are you going to do to promote a

strong ethical environment in your

organization?


Written goals and objectives?

• Internal control is pointless without goals and objectives.

• Written goals and objectives focus efforts toward desired outcomes.

• Written goals and objectives provide a rationale for resource allocation.

• Written goals and objectives are evidence of thoughtful management.


What objectives do we need?

• Mission statement.• Operations objectives.• Financial reporting objectives.• Compliance objectives.• Objectives for all significant activities.


What are risks?

• A risk is anything that could jeopardize the achievement of your organization’s objective.– Operate effectively and efficiently and achieve

our goals– Provide reliable financial data– Comply with applicable laws, policies, and

procedures– Protect the university’s assets from loss


Risk Assessment is a process to

• Identify significant risks

• Assess risks– What is the likelihood of occurrence?– What is the potential impact?

• Manage these risks through• Avoidance• Acceptance and Sharing (Insurance)• Mitigate with Controls


How do we identify risks?

• You know your risks.• For each objective, ask yourself:

– What could go wrong?– What assets do we need to protect?– How could someone steal from us?– What is our greatest legal exposure?– What else?


Assess Risks

• Likelihood – probability of occurrence• Impact – effect on IU/your organization

– Loss of resources– Loss of public trust– Violation of policies, laws, regulations– Bad publicity– Decreased enrollment– What else?


Control Activities

• The policies and procedures that help ensure that actions identified as necessary to manage risks are carried out properly and in a timely manner– must be implemented thoughtfully, conscientiously,

and consistently – unusual conditions identified must be investigated and

appropriate corrective action taken– Should be proactive, value added, and cost effective


Control Activities

• Approvals, Authorizations, and Verifications– Having written policies and procedures and

limits to authority

• Reconciliations– Explanations of the differences between

two different sets of data


Control Activities

• Reviews of Performance– For programs, departments, and individual

employees

• Security of Assets– Limiting access, keeping records, and making

periodic counts to compare to our records


Control Activities

• Segregation of Functions– The approval, recording/reconciling, and

custody functions should be segregated

• Controls over Information Systems– Application and development, controls within

applications, security of data and machines


What control activities do I need?

• Enough to help ensure that you are managing your significant risks.

• Actions should be taken and control activities should be performed to mitigate significant risks to acceptable levels.

• An action to manage a risk can be anything.


What needs to be approved?

• Per policy, all financial transactions must be approved by the dept Financial Administrator.– Financial Administrator can delegate

signature authority

• What to approve and what to delegate?• It depends on the risk assessment.• Generally, the higher the risk activities

the higher level of approval/authorization.


What needs to be reconciled?

• It depends on the risk assessment. Information about high risk activities should be reconciled to ensure its accuracy and completeness.

• Monthly operating reports must be reconciled to departmental records.

• Payroll voucher reports should be reviewed and compared to departmental records.

• What else?


What activities should be reviewed?

• It depends on the risk assessment

• Information about high risk activities must be reviewed by management.

• Generally, the Chair/Director/PI should review reports which compare budget to actual – To measure performance.– To detect problems.

• Performance reviews of staff• Management’s review should be documented.


What assets need to be secured?

• It depends on the risk assessment

• Liquid assets, assets with alternative uses, dangerous assets, vital documents, critical systems, and confidential information need to be secured.

• Access to these assets should be restricted.

• Perpetual records should be maintained; periodic physical counts should be performed--differences should be checked.


What duties need to be segregated?

• It depends on the risk assessment • The approval, accounting/reconciling, and

asset custody functions should be segregated.

• Generally, duties related to cash receipts, payroll and purchases are high risk and should be segregated.


How do we control our computers?

• It depends on the risk assessment • If critical or confidential information then both the

information and the computer need to be controlled.

• Basic controls are – Password protecting information.– Backing-up information.– Virus Scanning– Practicing safe computing– What else?


Information and Communication

• Communicate policies and procedures– Supervisors and employees understand

objectives and job responsibilities

• Get the information you (and staff) need • Do performance evaluations• Measure customer satisfaction• Open door policy

– Hear the good and the bad news


Monitor Performance

• Evaluating your Internal Controls to determine– Adequately designed– Properly executed, and– Effective

• How can we KNOW?


Monitor Performance

• Internal Controls are effective if you know:– The extent to which your organization’s goals

and objectives are being achieved– In compliance with relevant policies, etc.– Financial records are reliable– Assets are safeguarded– Resources are use to advance organization’s

mission


Who is Responsible for Control?

•EVERYONE• Management is responsible for establishing a controlled environment.

• Faculty and staff are responsible for carrying out internal controls by following policies and procedures.

• Internal Audit, in an advisory/consultant role, is responsible for evaluating whether appropriate controls have been implemented and if they are functioning as intended.


Internal Control

• Is a Process

• Designed to provide reasonable assurance that organization’s objectives will be met– Provides reliable financial reporting– Promotes efficient and effective operations – Helps ensure compliance with policy– Protects university Assets


Why Internal Controls fail?

• Human Errors - Bad Judgment• Management Override• Collusion• Cost versus Benefit


Internal Control components


Identify & Assess Risks

Document Risk Acceptance Decision

Acceptable

Organizational Objectives

Identify Current Controls

NoYes

Action

Define Organization’s Goals and Objectives?

Define goals and objectives in relation to

Mission, Activities and

processes, Financial reporting

requirements, and Compliance issues

Identify & Assess Residual Risks


SMART Goals & Objectives

S pecific

M easurable

A ttainable

R ealistic

T imeframe




Acceptable



NoYes

Action

Identify and assess potential RISKs by asking

What Could Go WRONG ?

What must go RIGHT?

How likely is it that the risk will happen?

What will be the impact) if it happens?






Acceptable


Identify Current Control s

NoYes

Action

What controls are in place to achieve your objectives ?

Control Environment Tone at Top Competence Roles &

Responsibilities Information &

Communication Control Activities




Acceptable



NoYes

Action

What could still go wrong given existing controls ?

Look at your risks, and your existing controls to identify any gaps.





Acceptable



NoYes

Action

Can you live with the Residual Risk ?

Do your existing controls, provide reasonable assurance that you will get achieve your objectives?

Something's you can’t control (changes in government regulations, weather)

Risk acceptance decision will depend on the culture of the organization





Acceptable



NoYes

Action

Action Planning

If the level of uncontrolled risk is too high/unacceptable then action plans are developed to reduce the residual risk to an acceptable level.



QUIZ - Internal control is a

• PROCESS of specific policies and procedures • Designed to provide reasonable assurance that

organization’s objectives will be met– Provide reliable financial reporting– Promote efficient and effective operations – Helps ensure compliance with policy– Protect university Assets


Who is Responsible for Control ?

• In a word, everyone

• Management is responsible for establishing a controlled environment.

• Faculty and staff are responsible for carrying out internal controls by following policies and procedures.

• Internal Audit, in an advisory/consultant role, is responsible for evaluating whether appropriate controls have been implemented and if they are functioning as intended.


QUIZ

• Name four Control Activities:

1.

2.

3.

4.


QUIZ

The most important Internal Control component is:

1. Risk assessment/management process

2. Hug your auditor

3. Positive “Tone at the Top”

4. Strong ethical climate

5. Control environment with answers 3 & 4


Quiz

Risk Assessment/Management is:

1. Planning a surprise birthday party

2. A department at IU

3. A process to assess risks and controls as they impact on the achievement of a business objective


QUIZ

Effective Internal Control Systems will:

1. Provide reasonable assurance that your organizations objectives will be met

2. Promote reliable financial reporting3. Provide efficient and effective operations 4. Help ensure compliance with policy5. Protect university assets6. All of the above


Quiz?

• Short Definition of Ethics?

• What are the Rules?


Case Study

• Identify 1- 3 SMART OBJECTIVES

• Identify the 1- 3 possible RISKs that would prevent you from achieving your objectives

• List the CONTROLS you would implement to mitigate these risks

Documents

Kuali Financial Systems – Financial Administrator Development Series – October 2006 Risks, Controls, & Ethics INDIANA UNIVERSITY Financial Administrator