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Why Accounting Systems and Internal Controls?. 2 CFR Part 215 OMB Circular A-110 Standards for Financial Management Systems. Effective control over and accountability for all funds, property and other assets. Recipients shall adequately safeguard all such assets and assure they are used solely for authorized purposes. .
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1. Internal Controls Section 6
2. Why Accounting Systems and Internal Controls?
3. 2 CFR Part 215 OMB Circular A-110Standards for Financial Management Systems Effective control over and accountability for all funds, property and other assets. Recipients shall adequately safeguard all such assets and assure they are used solely for authorized purposes.
4. Fraud Headlines Over an eight month period, more than $108,000 was stolen from a nonprofit organization in Alaska. The former financial director used the agency's credit cards to purchase more than $88,000 of personal items and cash advances. He also stole roughly $2,500 of petty cash and took $8,500 in 'illegal reimbursements.' As finance officer, he was responsible for record keeping, paying bills, and reconciling credit card statements. The executive director was asked to resign, and said that "...the internal controls weren't in place in the organization." (This was a simple case of too much opportunity and no controls.)
5. Fraud Headlines
In Florida, an employee of an organization that operates Workforce Investment Act programs is charged with single-handedly stealing more than $2.4 million over five years. A newspaper article stated that the person worked in the accounting department paying vendors and wrote dozens of checks to herself over several years. She had been employed at the organization since 1994 and had a theft-related record. When she was hired, the organization did not perform background checks.
6. Credit Card Theft In New Jersey, the former chief financial officer of a federally funded nonprofit organization pleaded guilty to stealing more than $51,000 from the agency by using her position to authorize payment to credit card companies to pay off her personal debt. (Credit card statements must be reviewed by someone outside of the finance function.
7. What Are Internal Controls? Internal controls are the measures (procedures) an organization adopts to :
Encourage adherence to agency policies and procedures
Promote operational efficiency and effectiveness
Safeguard assets
Ensure reliability of accounting data
8. Basic Internal Controls Segregation of Duties
One should not have responsibility of more than one:
Authorization
Custody
Record keeping
Personnel
Competent and trustworthy
Clear established lines of authority
Documented job description and procedures manuals
Physical Restrictions
Safe
Passwords
Alarm systems
Authorized Procedures
Timesheets signed by supervisors
Approval of purchases
9. Separation of Duties in Small BusinessesCash Receipts, Cash Disbursements, and PayrollTwo-person Office Approve and sign checks
Sign employee contracts
Complete deposit slips
Perform interbank transfers
Distribute payroll
Reconcile petty cash
Approve employee time sheets
Process vendor invoices
Review bank reconciliations and contents of bank statements Record accounts receivable entries
Mail checks
Write checks
Record general ledger entries
Reconcile bank statements
Record credits/debits in accounting records
Approve payroll
Receive cash
Disburse petty cash
Authorize purchase orders
Authorize check requests
Authorize invoices for payment
10. Three-Person Office
11. Four-Person Office
12. Fraud How Does It Happen?
14. What is Fraud? An intentional misrepresentation of facts made by an individual to deprive another person or organization of something of value
16. Motive-Individual Gambling, alcohol/drugs
Unexpected expenses-illness,etc
Living beyond means-greed
Resentment-against boss
Getting even, just taking what they owe me
17. Opportunities Organizationally Created Lack of administrative, operational, processing or documentation controls
Rapid turnover of key employees
Inadequate personnel screening policies
Impersonal relationships and low morale
Absence of policies and procedures
18. Opportunities-Personally Created Familiarity with operations, including cover-up capabilities
Position of trust where employee is left on their own.
Close association with supplies
Collusion
19. Rationalization-End Justifies Means They treat me unfairly and owe me.
I am only borrowing the money and I will pay it back.
This is a big organization and a little wont matter to them.
Everybody does it.
Ill stop when
Nobody will get hurt.
20. Case Study Human service agency hires former nun as bookkeeper, Executive Director sympathetic to her. Employee is dedicated, hard working, and committed. Agency is in growth mode. Change to move to automated accounting system was resisted. Efforts to provide additional staff to help her were unsuccessful one man show. They didnt work as hard as she did. ED trusted this employee explicitly and had personal friendship. Employee was sole contact for auditors. The board trusted her. She became resentful of ED who she felt was not paying enough attention to her. ED felt the workload had increased so significantly that she needed help. She hired a CPA over her. Bookkeeper resigned 30 days later with grand send off.
21. Case Outcome Embezzled $83,000 over period of three years
Created fake invoices from credible vendors
Altered payee on checks after they were signed (manual checks) She received them to mail them
She received the bank statements when returned (hard copies) and removed checks she made payable to herself
She falsified the bank reconciliation
She explained away any inconsistencies to auditors and was believed
Embezzled discovered, employee was arrested and charged with grand theft
Employee served time in jail and five years probation
22. Misuse of Grant Funds
Time Sheet Fraud
Embezzlement
Education Award Fraud
Theft Common Crimes Detectable by Observing Fraud Indicators
23. Misuse of Grant Funds Is CNCS grant the major or only funding source
Are Federal grant funds being diverted to keep the organization in business
Does the grantee drawdown all or most of its grant funds well before the end of grant year
24. Misuse of Grant Funds Are costs for what appears to be non-grant expenditures being charged to the grant
Are funds drawn down on unfilled slots
Are unauthorized employee salaries being charged against the grant
25. Time Sheet Fraud Are service hours being properly documented
Are hours being claimed reasonable and allowable
Are program officials verifying the hours and type of service claimed
Are individuals hand carrying their own time sheet from their sub-sites to grantees office
Do documents appear to have all been prepared at the same time
Are staff employees tracking grant hours
26. Embezzlement Are secondary endorsements obtained when required
Are members/volunteers and staff being paid
Are payments being made for ghost or absent individuals
Do documents show frequent use of white out, pen and ink changes, or strikeouts
27. Embezzlement Are documents missing or copies being used instead of originals
Is there an individual who always has an excuse for a chronic shortage of funds
28. Fraud Indicators
29. Fraud Indicators
30. Education Award Fraud Are hours being certified consistent with hours served?
Are staff employees receiving education awards?
Are award recipients using their award for non-education expenses?
31. Education Award Fraud Are early separating members receiving an award without having a compelling reason for ending his/her service?
Are program officials awarding bonus or doubling hours?
Did members earn their award?
32. Theft Can receipts for items be traced to a valid purchase?
Is property controlled or inventoried for accountability?
Are charge card purchases being monitored and verified?
Is excessive mileage being claimed for travel to project sites?
Does grantee have proper checks and balances in place to safeguard program funds?