Best Practices for Local Governments & Legislative Auditor's Update October 7, 2009 GFOA Fall Conference
Purpose of Best Practices Checklist? The Best Practices Checklist is intended to (1) assist you in improving controls over the municipality’s financial operations; (2) provide you with good business practices; and (3) ensure compliance with state laws. • More than just a checklist – it requires: • Inquiry • Reviewing source documents • Reviewing procedures and controls • Analytical procedures
The checklist is not all-inclusive • As we provide advisory services we find more common deficiencies • We plan to keep the checklist updated as we continue to provide advisory services to local government • Our recommendations are presented to improve the controls that safeguard, manage, and account for assets of the entity and ensure compliance with applicable state laws. However, management should consider the costs of implementing these recommendations compared to the benefits they will provide. For those recommendations not implemented, management should be aware of the risks of not implementing such controls.
Since the checklist was prepared, other problem areas have been identified that we need to include on the checklist. • For example, contracting for services: • Are all contracted services supported by a written contract? • Are contracted services necessary or needed, and is contracting out services the most cost-efficient manner for accomplishing the objectives? • Are competitive prices obtained? Although the public bid law does not require services (professional or otherwise) to be bid, a competitive atmosphere would ensure that fees paid for services are cost-effective • Are all contracts reviewed by legal advisor before the contracts are signed?
Do consultant invoices contain sufficient details as to the work performed? • Is there a centralized review and oversight of all contracts to ensure that services received comply with the terms and conditions of the contracts? • Examples of contracts: • Information System (Computer) Services • Public Relations and Marketing Plan • Lawn Maintenance • Legal
Written Policies and Procedures • No formal, written policies and procedures--biggest problem that we see • Necessary to provide a clear understanding of: • What should be done • How it should be done • Who should do it • When it should be done
Written Policies and Procedures • Why are they important? • Lessens the risk of violating state law and local ordinances • Establishes controls that can deter theft and other losses • Ensures continuity of operations • Helps to cross-train staff • Holds staff accountable
Budgeting • The questions are intended to cover both compliance with the Local Government Budget Act (R.S. 39:1301 - 1315) and management’s responsibility in using the budget as a tool to manage the entity and control spending. • Are there written budget policies and procedures for preparing, adopting, monitoring and amending the budget? Yes □ No □ • Does the agency’s budget include the following (R.S. 39:1305)? • Adopted budget for the General Fund andall special revenue funds ? • Yes □ No □
Budgeting • Budget message, including the preparer’s signature? Yes □ No □ • Estimated fund balances at the beginning of the year ? Yes □ No □ • Estimated fund balances at the end of the year? Yes □ No □ • Proposed budget adoption instrument that defines the authority and powers of management and governing body in making changes to budget ? Yes □ No □ • Ordinance (effect of law) vs. Resolution (effect of opinion) • Lawrason Act – Budget and Amendments (by ordinance)
Financial Statements • Is there a written policy that provides the • nature, extent, and frequency of financial • reporting information that should be provided • to management and the governing body? Yes □ No □ • Are monthly financial statements for all funds • prepared and presented to the governing body? Yes □ No □ • Do these monthly financial statements include • a comparison with the adopted budget? Yes □ No □ • Does the governing body discuss the budget and actual financial results at its regular or finance committee meetings? If so, is this action reflected on the monthly meeting agenda and clearly documented in the minutes? • Yes □ No □
Purchasing • Are there written purchasing policies and • procedures? Yes □ No □ • If not, there is a high risk of control weaknesses and violations of state laws. • Formal/written policies and procedures are necessary as a clear understanding of what should be done, how it should be done, who should do it, and when it should be done, and that the procedures followed meet management’s expectations. • Written procedures aid in continuity of operation and for cross-training of staff.
The purchasing policies and procedures • should include, at a minimum, the following: • How purchases are initiated • Use of purchase requisitions • Types of requisitions (capital assets, supplies, travel, et cetera) • Approval process for requisitions • Preparation and approval process of purchase orders • Checks and balances to ensure compliance with the bid law
Procedures for requests for proposals • Documentation to be maintained regarding all bids. For example: • Bid notification letters that include the contract, plans, and specifications • Documentation that the bids were properly advertised • Bid opening documentation that include the submitted bids, bid tabulation sheet, and indication of which bid was accepted
Purchasing/Disbursements • Are there written procedures for disbursing • funds? Yes □ No □ • Are at least three telephone or facsimile quotations obtained and documented as part of the approval process for purchases of materials or supplies costing between $10,000 and $20,000, as required by R.S. 38:2212? Yes □ No □ • Are there recurring purchases of like commodities that in the aggregate exceed the bid limit? Yes □ No □ • 18. Is there an adequate system of checks and balances over the purchasing and disbursement functions (e.g., same employee that prepares the checks also reconciles the bank account would not be a proper system of checks and balances)? Yes □ No □
Purchasing/Disbursements • Are all disbursements supported by adequate documentation (purchase order, receiving report, vendor invoice, et cetera)? Yes □ No □ • If a check signing machine is used, is access restricted to the key and/or combination? • Yes □ No □ • Are bank statements and related canceled checks and validated deposit slips reviewed and reconciled timely (monthly) to the general ledger balances? • Yes □ No □
Credit Cards • Does the entity use credit cards? If so, • is there a written policy for using credit • cards? • Yes □ No □ • Are there itemized/detailed receipts and other appropriate documentation for all credit card charges appearing on the monthly statement? Yes □ No □ • Is the business purpose clearly documented for all charges appearing on the credit card statements, including names of persons participating? Yes □ No □
Grants and Gifts • Are funds, credit, property, or things of • value loaned, pledged, or donated to or • for any person, association, or • corporation? • Yes □ No □
Article VII, Section 14 of the LA Constitution of 1974 • Examples of gifts include: • insufficient effort to collect delinquent accounts receivable • paying bonuses • purchasing flowers or gifts for employees or others
using public funds for a Christmas party • using public funds to help defray the cost of a banquet honoring retirees • giving or donating funds to groups for which there is no cooperative endeavor agreement in place • Are grants to nonprofits or other entities supported by adequate cooperative endeavor agreements? Yes □ No □
Cooperative Endeavor Agreement • Must be public purpose for expenditure • The expenditure must not appear to be gratuitous • Must be evidence demonstrating that the municipality has a reasonable expectation of receiving a benefit or value at least equivalent to the amount of the expenditure.
Travel • Is there a travel policy? Yes □ No □ • Are standardized expense reports for reimbursement prepared and do they include all appropriate documentation (itemized receipts, registration forms, conference brochures, mileage logs, et cetera) supporting the business nature of the expenditures? • Yes □ No □
Payroll and Attendance Records • Payroll is generally the largest expenditure/expense of any government entity. Therefore, it is important that controls over payroll are in place and working properly. • Do all entity personnel prepare and file time/attendance reports? Yes □ No • Are reports approved by supervisor? Yes □ No • Are there adequate records maintained to account for vacation and sick leave earned and taken by all employees? Yes □ No • Are personnel files maintained on all employees? Yes □ No
Payroll and Attendance Records • Is there a computer-generated report available that shows all changes made to payroll (employees added/deleted and pay rate changes)? If so, does someone independent of the payroll and human resources departments review this report each pay period for accuracy and to ensure that all changes are authorized? • Yes □ No □
Accounts Receivable • Is the accounts receivable balance in the • general ledger reconciled monthly with the • detailed accounts receivable listing? • Yes □ No □ • Not reconciling the detailed accounts receivable listing and detailed listing of customers’ meter deposits to the balances in the general ledger on a monthly basis is a fraud risk factor.
Accounts Receivable • Is the meter deposit liability in the general ledger reconciled monthly with the detailed listing of customers’ meter deposits and the related cash in bank? Yes □ No □ • Are adjustments approved by someone who is not involved in the billing process and is the approval documented? Yes □ No □ • Is there a formal policy for collecting delinquent accounts receivable? If so, is the policy being followed? Yes □ No □
Collections • Fidelity bond insurance • Separate cash drawer/trays
Capital Assets • Are capital assets tagged for ownership and control purposes?Yes □ No • Are decals on vehicles? Yes □ No • Are physical inventories conducted periodically of all capital assets? • Yes □ No
Special Taxes (e.g. Sales Tax and Ad Valorem Tax) • Have there been any loans or inappropriate transfers of dedicated taxes? • Yes □ No □ • Are separate bank accounts maintained for dedicated taxes? Yes □ No □ • Are expenditures of dedicated taxes clearly identified in general ledger? Yes □ No □
Ethics • Does the entity have a written ethics policy? Yes □ No □ • Does the entity obtain annual certification letters from board members and employees attesting to their compliance with the ethics policy? • Yes □ No □ • Does entity engage in transactions with related parties? Yes □ No □
Gasoline/Diesel • Does the agency exercise adequate controls (checks and balances) over its gasoline/diesel pumps and/or credit cards? Yes □ No □ • Is a log maintained (e.g. date, employee name, vehicle odometer reading, tank meter reading, number of gallons dispensed) and the miles per gallon calculated on a periodic basis for reasonableness? Yes □ No □
Traffic Tickets and Misdemeanor Summonses • Is the supply of traffic/misdemeanor ticket books adequately safeguarded? Yes □ No □ • Are ticket books issued to police officers reconciled/agreed with the issued citations returned by those officers? Yes □ No □ • Are all actions for traffic citations handled in court and included in the court minutes? Yes □ No □ • Are traffic violations reported to the Louisiana Department of Public Safety as required by state law [R.S. 32:393(c)]? Yes □ No □ Other: • Mayor’s Court vs. Appointed Magistrate • Collection of fines
Evidence Rooms • Are there policies and procedures for confiscated items, including recording, maintaining, inventorying, and disposing of evidence? Yes □ No □ • Is a log maintained that provides the name, date, time, and reason for entering the evidence room? Yes □ No □ • Are physical inventories of the evidence room conducted periodically? Yes □ No □ • Lack of control increases risk that evidence will be lost, stolen, or disposed of improperly.
Disaster Recovery/Business Continuity • Sound business practices and good internal controls require that the entity develop a written disaster recovery/business continuity plan (including computer system and continued operations/functions of the entity) and to test the plan at least annually. • The plan should include a recovery plan to obtain access to an offsite facility to provide for the timely restoration of operations in the event the entity’s facility is unavailable for an extended period of time.
Disaster Recovery/Business Continuity • Does the agency have a written disaster recovery/business continuity plan in the event of a disaster? Yes □ No □ • Is the disaster recovery process tested annually? Yes □ No □ • Is the agency backing-up computer files daily and storing these files offsite? Yes □ No □
Information Technology • Is physical access to the computer room restricted? Yes □ No □
Prior Year Audit Findings • Are the audit findings resolved on a timely basis? Yes □ No □ • We suggest that the board/council be provided a monthly status report until all findings are satisfactorily resolved.
Fraud Considerations • Are there any incentives or pressures to misstate the financial statements (e.g., pressure to overstate revenue, understate expenses/expenditures, etc.)? Yes □ No □
Fraud Considerations • Are there any employees that have recently had or are having personal financial hardships (e.g., loss of job by spouse, family business failing, etc.)? If yes, do any of these employees have access to cash or other assets susceptible to theft? Yes □ No □ • Do all employees who have access to cash or other assets susceptible to theft take an annual vacation? If so, does someone perform their duties in their absence? Yes □ No □
Conclusion: • Whose responsibility is it to implement controls in a government organization?
Management is responsible for designing and implementing controls to prevent and detect fraud
LLA Update • Obtaining records for audit • Confidentiality of records • Energy efficiency contracts • American Recovery and Reinvestment Act • Best practices • Internal controls—recession • Federal funds and not for profits
LLA Web site • http://www.lla.la.gov/localgovernment/bestpractices/
For additional information contact: Advisory Services Division Louisiana Legislative Auditor Post Office Box 94397 Baton Rouge, LA 70804 (225) 339-3800 (225) 339-3999 – fax www.lla.la.gov