Segregation of Duties in Office of Three, Two, or One

1. Segregation of Duties in Office of Three, Two, or One Matt Malinowski Susan Green

2. Internal Control Myths and 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.

3. Could this Happen to You? Examples of Fraud • Benefit payment receipt • County Official – Post office refunds • Do you have a fraud policy?

4. Costs of Fraud • Money • Reputation • Public Trust • Acceptable Practice / prevalent in other areas

5. Fraud • Definition from Merriam Webster Online Dictionary: a:deceit, trickery; specifically: intentional perversion of truth in order to induce another to part with something of value or to surrender a legal right b: an act of deceiving or misrepresenting :trick

6. Common Types of Public Sector Fraud • Payroll Fraud • Benefit Fraud • Double Payments • Charge Off Fraud • Disposal Fraud • Travel Claim Fraud

7. What is “Segregation of Duties” • Simply what it sounds like – Separating Duties

8. 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

9. Segregation of Duties • Do I have to add more people to make this work? NO

10. 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 that a given risk will materialize? • Inherent Risk – Where will there always be risk?

11. Ways to Implement Solutions with Less Staff? • Rotation of duties • Mandatory vacation • Job rotation periodically / cross training • Management oversight • Open the mail twice a month • Reconcile the checking account periodically • Review, review, review • Third party help such as consultants

12. Key Cycles • Receipts • Manual checks and cash • Electronic receipts • Disbursements • Board checks • Payroll

13. Key Duties • Transaction – • Initiation • Approval • Recording • Reconciliation • Asset handling • Review of reports • You don’t have 6 employees in your business office. Now what?

14. Example of Maintaining the Three Separate Functions • Person #1 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.

15. Compensating Controls • After the fact review • Review of the bank reconciliation is a compensating control vs. review of the check register before checks are cut

16. 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 • Leave approval and leave posting • Technology for efficiency = sub calling / electronic leave recording

17. Focus on Major Areas • Separate • approval, • accounting/reconciliation • Safeguarding • Reduce/eliminate those that accept and disburse funds

18. Identifying Potential Risks Assertions to ensure that all significant risks are identified in a purchasing cycle: • Has a purchase been recorded for goods not yet received? Has a vendor been paid twice? • Have purchases been made, but not recorded? • Were all purchases properly authorized? • Were charges to appropriate accounts?

19. 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)

20. Examples of Internal Controls • Budget preparation, monitoring • Purchasing/Payroll functions • Tax Collection/Reporting – (tax collector’s course) • Investments • Records

21. 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. • Roslyn School District, New York - • http://www.osc.state.ny.us/localgov/audits/2006/schools/roslynfoll.pdf (a real life scandal) • GFOA article "Evaluating Internal Controls" • http://goliath.ecnext.com/coms2/gi_0199-2938675/Evaluating-internal-controls-control-self.html