Internal Controls, Student Activity and Enterprise Funds

1. Internal Controls,Student Activityand Enterprise Funds Presented by Scott Clelland Iselin, Livingston, Flemington, New York www.wiss.com

2. Overview of the Program • General Overview of Internal Controls • Recently issued Comptroller Guide for Internal Controls • Student Activity Funds • Enterprise Funds • Questions

3. Understanding Internal Controls What are Internal Controls? • Internal Controls are an integral part of any organization’s policies and procedures, that can be affected by its Board, management, and other personnel, that is designed to provide reasonable (not absolute!) assurance regarding the achievement of the following objectives: • Protecting its resources against waste, abuse, fraud or inefficiency • Reliability and accuracy of financial reporting • Effectiveness and efficiency of operations • Compliance with laws and regulations

4. Understanding Internal Controls Why are Internal Controls Important? • They help protect us from bad things happening! • As accountants we are very risk adverse individuals • Internal Controls help mitigate risk • Won’t eliminate risk

5. Understanding Internal Controls Internal Controls Are Simple? • What do you worry about going wrong? • What keeps you up at night? • What steps have been taken to assure it doesn’t go wrong? • Where are those internal controls? • How do you know everything is under control? • Have you looked to see if everything is working correctly?

6. Understanding Internal Controls • We implement internal controls in our everyday life: • Lock the front door before we leave our house everyday • Lock the doors to our car when we go shopping • Balance your checkbook • Matching credit card receipts to monthly statements • Only purchase items online if the website has a secure portal • Keep copies of important information such as your tax returns

7. Office of the State Comptroller-Internal Control Guide • Recently issued (November 2011) • Stresses the need to reassess internal controls and the importance of maintaining a strong internal control environment • Major component is the ongoing monitoring of the internal control environment to ensure controls continue to be adequate and function properly in light of current conditions

8. Office of the State Comptroller-Internal Control Guide • Factors that affect internal controls • External • New regulations/statutes • State aid • Economic conditions • Internal • Employee turnover in key positions • Technological changes

9. Understanding Internal Controls • COSO’s Internal Control Framework: • Five concepts dependent on each other • Control Environment • Risk Assessment • Control Activities • Information & Communication • Monitoring

10. Understanding Internal Controls • Monitoring • After internal controls are put in place, their effectiveness needs to be monitored from time to time to ensure that the controls in place continue to be adequate and continue to function properly • Are they operating as intended? • Have the controls become outdated, redundant or obsolete? • Management and the Board of the District should also monitor previously identified deficiencies to ensure they are corrected

11. Basic Internal Controls • Effective Oversight • Approvals • Make sure everyone is aware of policy and procedures • Make sure everyone understands the controls • Make sure everyone understands the repercussions if internal controls are not followed • Communication as a deterrent • Monitoring

12. Characteristics of Fraud-The Fraud Triangle 3 Conditions generally present when fraud occurs: • Management or other employees have an Incentive or are under pressure, which provides a reason to commit fraud • The absence of controls, ineffective controls, or the ability of management to override controls provides an opportunity for a fraud to be perpetrated • Those involved are able to rationalize committing a fraudulent act. Some individuals possess an attitude, character, or set of unethical values that allow them to knowingly commit a dishonest act.

13. Student Activity (SAF) and Enterprise Funds • Student Activity / Athletic Funds • Enterprise Funds • Food Service Mgt./Cafeteria Operations • Other Enterprise Funds • Before and After School Programs • Community Education programs

14. Student Activity and Athletic Funds • Are your controls sufficient? • Is there proper oversight and monitoring? • Are the responsible employees aware of the oversight and monitoring? • There are significant funds that flow thru the high school student activity accounts and sometimes the middle school-they should be reviewed and monitored more than they are currently-additional oversight

15. Student Activity and Athletic Funds • Although in most cases, the funds are the responsibilities of the individual schools, indirect responsibility for supervision falls on the Board of Education • Districts should have good policies and procedures in place for use of the funds • Districts are required to formally approve each fund in the district • Districts must ensure that financial and bookkeeping controls are established and functioning properly

16. Student Activity and Athletic Funds • Board Policy should include at least the following: • Receipts must be detailed showing date, source, purpose and amount. • All receipts are required to be promptly deposited and bank deposits must agree with the receipts in the cash receipt book and must be traceable to supporting receipts or groups of receipts. • Disbursements must be recorded chronologically showing date, vendor, check number, purpose and amount. All disbursements must be made by check and supported by a claim, bill or written order to the persons supervising the fund. Checks should bear 2 or more signatures.

17. Student Activity and Athletic Funds • Board Policy should include at least the following: • Book balances must be reconciled with bank balances and cancelled checks must be retained for examination by auditor • Student activity funds must be classified by school • Borrowing from the student activity funds is prohibited • Maintenance of complete sets of cash receipt and disbursement records

18. Student Activity and Athletic Funds • Fund Raising in Schools by Outside Organizations • Charitable organizations • Not subject to audit • Board must give permission for collection to be made in schools • Collector of funds serving as a private citizen and not employee of the District • Accurate records should be maintained but not the responsibility of the District • Collected funds should not be commingled. If commingled, funds become subjected to annual audit

19. Student Activity and Athletic Funds • Funds of Teacher Organizations and Parent Teacher Organizations • Funds for these type organizations should be maintained by the separate organization and not commingled with the SAF • Board should not be responsible for these funds • If commingled, places some responsibility on the Board and funds become subject to audit • A school employee who serves on one of these Boards does so as a private citizen • Entities should have a separate ID number and NFP status letter

20. Student Activity and Athletic Funds • Funds Collected by Teachers from Pupils for Immediate Purchase of Items • Teachers may at times receive money from children for the purchase of magazines, tickets, etc. in bulk to save money for the children • State believes the teacher is representing the children and not the school and the teacher assumed full responsibility for the collection of and use of the funds

21. Student Activity and Athletic Funds • Items identified as control deficiencies or in violation of State guidelines-SAF • No formal policy in place directing the schools as to how the funds can be utilized • Items purchased from SAF that should be processed through the normal district purchasing process • No oversight at all by business office. Although not required, it is a good idea to request information and review • Bank reconciliations not performed

22. Student Activity and Athletic Funds • Items identified as control deficiencies or in violation of State guidelines-SAF • Sunshine funds maintained for special school parties and commingled with SAF • Funds not used for the originally intended purpose or disbursed for non-student related purposes • No policy in place to address what happens when there are funds remaining after the event or purchase • Class funds that remain after that class has graduated • Refunds

23. Student Activity and Athletic Funds • Items identified as control deficiencies or in violation of State guidelines-SAF • No actual purchase order or payment process in place • No supporting documentation for receipts or disbursements • One signature on checks • No live signatures on checks • Cash collected and held for significant period of time and not deposited • No approval process prior to goods or services being ordered

24. Student Activity and Athletic Funds • Items identified as control deficiencies or in violation of State guidelines-SAF • Employees paid from the SAF to chaperone, etc. and not included as income on employees W-2 • 1099s not issued for vendors that exceed the IRS threshold • Circumvention of the procurement process/bids/quotes • Bank accounts established without Board approval • Outside organizations and sunshine accounts using the District’s bank accounts and ID numbers

25. Student Activity and Athletic Funds • Items identified as control deficiencies or in violation of State guidelines-SAF • Receipts from tickets sales not reconciled with actual tickets sold/issued-many use a standardized worksheet that documents the 1st and last ticket number issued and is reconciled to the cash deposited • Receipts for funds collected by individuals (one person collecting for members of a team) are usually held until all funds are collected and there is no listing of who the funds were received from (untimely deposits-higher risk of theft or misplacing) • Poor reconciliation over funds collected and disbursed

26. Student Activity and Athletic Funds • Items identified as control deficiencies or in violation of State guidelines-Athletic Funds • 1099s not issued where appropriate • Checks are many times drawn up and signed prior to the referee performing the service. If they do not show and provide the service, checks are later voided • Lack of referee sign-in sheets-each ref should be pre authorized and there should be some type of sign in sheet to document that they refereed, which is reviewed by AD or other authorized individual • Controls over how and for what purpose the athletic funds are used

27. Things to Consider-SAF and Athletic Funds • Make sure you have a good policy in place that is clear how funds should be collected and used • Make sure the individuals responsible for controlling the accounts are aware of their responsibilities • Recirculate policy at the commencement of each school year • Require quarterly reports or some type of information to be sent to the business office so that there is some oversight and deterrent from misusing the funds

28. Things to Consider-SAF and Athletic Funds • Audit findings are not addressed properly and become repeat comments that impact QSAC score • Neglected by school district as they are maintained by schools but ultimately are responsibility of the Board • Know at least what is going on-there is a lot of money being collected and spent from many of the accounts • Risk of embarrassment more so than a material loss to the District

29. Things to Consider-SAF and Athletic Funds • No commingling of funds-once they are in the District’s name they are subject to audit • Hold those responsible more accountable • Bring the records into the business office if controls not followed • Most importantly-monitor to some degree what is flowing through the books of the school activities • Sample forms and policy follow

30. Case Studies of Things That Could Go Wrong Student Activity Fund Case Study • Cash and checks received by club advisor • Funds turned over to Treasurer • Checks deposited • Cash taken by Treasurer • How the fraud was discovered

31. Case Studies of Things That Could Go Wrong Athletic Fund Case Study • Access to blank check stock and signature plates • Duplicate check created • Used odd amount on check • Deposited check in out of state bank • How the fraud was discovered • Impact - $25,000

32. Enterprise Funds • Used to account for transactions that are similar to business operations in the private sector • Most common examples • Regional Day Schools • Community or Adult Ed programs • Before and After School Programs • Food service programs • Other Latchkey programs

33. Enterprise Funds • Should be maintained in the District’s general ledger system • Controls should be similar to the controls over the normal operations of the District • Invoices included on bill list • Funds must be reconciled by Treasurer or Board designated individual • Food service – management company or internal

34. Food Service Enterprise Fund • All income must be deposited in any District approved bank and reconciled monthly • Food service funds must be accounted for separately from all other funds • Board may by resolution designate the Board Secretary or other person to approve payments without Board Approval to expedite payment process • Loans or advances from the Board to a food service management company are prohibited

35. Food Service Enterprise Fund • Food service company must provide itemized claims for services and goods for reimbursement • Must have a contract with the food service management company that clearly lays out the terms • Samples of forms and requirements are outlined in section II-60 in the State Audit Program

36. Food Service Enterprise Fund • Most districts contract with an outside management company • Management fee-verified? • Break even requirement and refunds-are the calculations correct • Contribution of capital assets and amortization as part of the contract-are they recorded? • Who owns the inventory-is it recorded

37. Food Service Enterprise Fund • Reconciliation of meals served per the operating statement to meal count sheets. There was a recent issue regarding the overstatement of meals served and operating statement results • Reconciliation of commodities from operating statement to Department of Agriculture records/confirm • Capital asset purchase agreement arrangements • Discounts received on purchases by the FSMC must be passed on to the District

38. Food Service Enterprise Fund • Operating Statement • Does anyone look at it? • Is it accurate or reasonable? • Are you only concerned whether or not you are breaking even?

39. Food Service Enterprise Fund • Operating Statement Issues Identified • Revenues misrepresented • Inventory miscalculated • Expenditures from other districts charged to your district • Free and reduced meals not recorded properly • There are many ways in which errors can occur and not be detected by the District • Who understands it completely

40. Food Service Enterprise Fund • Receivables, deferred revenues and prepaid accounts-student online accounts • Equipment purchases by vendor and amortization • Timing of recording of cash versus accrual • Services provided to other entities and related receivable and revenue • Issues with credit card purchases and reconciliation to operating statement

41. Case Studies of Things That Could Go Wrong Food Service Management/Cafeteria Operations • Misappropriation or inaccurate recording of Inventory • Incomplete recording of cash transactions • Fraudulent time sheets of part time workers • Erroneous reporting of free and reduced meals • Manipulation of operating statements

42. Case Studies of Things That Could Go Wrong Food Service Operations • Manipulation of the Operating Statement • Contract with vendor-guarantee included • Inaccurate reporting of state and federal subsidies and inventory • Drives profit to meet guarantee • How the error was discovered • Impact - $45,000

43. Case Studies of Things That Could Go Wrong Cash Receipts-Food Service Fraud Example • Incomplete recording of cash • Replacement of cash with checks • Miscellaneous unanticipated revenue

44. Case Studies of Things That Could Go Wrong Enterprise Fund Cash Receipts Case Study • Procedures to divert cash • Collections of unanticipated revenue • How the fraud was discovered • Impact - $90,000

45. Suggestions for Implementing Additional Controls-Food Service Enterprise Fund • Make sure you understand everything that is in the contract • Let the vendor know you are looking at the management report closely • Recalculate some of the amounts and review for reasonableness • Make sure the guarantee is met and if not that the District receives a refund as per agreement • Did you get the equipment that was included in the contract? • Do not just rely on the operating statement without looking at it

46. Conclusion and Wrap-Up Limitations on Internal Control • Only as good as the people using it • Management override of any control can cause a deficiency to occur • Collusion by two or more people can render a control ineffective • Monitoring Important

47. Conclusion and Wrap-up Any questions you can reach me at: • Scott Clelland 732-283-9300

48. Conclusion and Wrap-up Questions????