Virginia Association of School Business Officers Getting Reacquainted with Internal Controls Presented by John S. Aldridge, CPA

Transcription

1 Virginia Association of School Business Officers Getting Reacquainted with Internal Controls Presented by John S. Aldridge, CPA

2 Introduction What are internal controls?

3 Simple Definition Internal control is what we do to see that the things we want to happen will happen And the things we don t want to happen won t happen.

4 Internal Controls Are Common Sense What do you worry about going wrong? What steps have been taken to assure it doesn t? How do you know things are under control?

5 Internal Controls are everywhere: You exercise internal control principles in your personal life when you: Lock your house when you leave Keep copies of important papers in your safety deposit box Balance your checkbook Keep your ATM/debit card PIN number separate from your card Keep your computer password locked Monitor your credit report

6 Fraud Overview Fraud Definition Intentional perversion of the truth in order to induce another to part with something of value or to surrender a legal right Fraud involves Deception Intent Confidence Trust

7 Fraud Overview (cont.) Types of Fraud Against an organization Employee embezzlement Vendor fraud Customer fraud Fraud on behalf of an organization Management fraud Investment scams

8 Fraud Overview (cont.) Vendor Fraud Businesses are often the target of unscrupulous contractors/vendors overcharging, over billing, kick backs, failing to perform contracted work or service, and other actions. Examples A carpet cleaner is hired to work for a business after hours. The business is billed for weekly service when in reality service is rendered only monthly. A business places an order for 50 chairs, but only 45 are delivered. No one notices the deliberate shortage and the bill is paid in full.

9 Fraud Overview (cont.) Customer Fraud Customer fraud has emerged as a war against companies and is adapted to specific situations. Surprisingly, ethics has little to do with some types of customer fraud. Rather, in some cases the customer s motivation is a need to get even. Some fraudsters believe they have an obligation to commit fraud; they do it to retaliate against what they perceive as unethical acts that businesses commit against them. A basic example of customer fraud is theft. This includes outright theft of goods, but can also include forgery, counterfeit money and deceit to obtain more cash back. An example is someone saying they gave you a fifty dollar bill when they only gave you a twenty.

10 The Origins of Fraud

11 The Fraud Triangle Opportunity is generally provided through weaknesses in internal controls: No separation of duties Little supervision and review Lack of management approval Few system controls Pressure can be imposed due to: Personal financial problems Personal vices such as gambling, drugs, extensive debt, etc. Unrealistic deadlines and performance goals Rationalization justification for fraudulent activities: I really need this money and I ll put it back when I get my paycheck I d rather have the company on my back than the IRS I just can t afford to lose my home, car, everything I need to make my numbers for this quarter

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13 What is an Activity Fund? They are established to direct and account for monies used to support co curricular and extracurricular student activities. * Co curricular activities are any kinds of schoolrelated activities outside the regular classroom that directly add value to the formal or stated curriculum. * Extra curricular activities are a wide variety of other district directed activities. (organized sports and other non academic interscholastic competitions)

14 Activity Funds They are especially vulnerable to error, misuse, and fraud. They can total to large sums of money. (school board funds, student generated funds, receipts and disbursements related to athletics, etc.)

15 Who controls the funds? Student activity funds remain under the building principal and are accounted for at the school site. The principal is viewed as responsible for the accounts at his/her school

16 Principal At each site, they should be designated the activity fund supervisor for that school. They have overall responsibility for the operation of all activity funds, including collecting and depositing activity fund monies; approving disbursements of student activity fund monies; and adequately supervising all bookkeeping responsibilities. They should be signatory to all disbursements, including checks drawn on the activity fund.

17 Segregation of Duties Related to Activity Funds Internal control procedures designed to safeguard monies collected should be especially emphasized. Three critical duties should be segregated for internal control purposes: Signing checks Maintaining fund accounting records Reconciling bank statements

18 Continued More than one person needs to be involved in satisfying accounting procedures. The administrator is appointed as activity fund supervisor, but other people normally carry out the actual work. It is important to identify, describe, and monitor the duties of the activity fund bookkeeper in relation to the segregation of duties. The signatures controls are an important aspect. Two signatures should be required on all checks that result in disbursement from the activity fund.

19 Continued It is recommended that one be the principal and the other be someone other than the activity fund bookkeeper. A third person (someone other than the bookkeeper and principal) should be responsible for reconciling bank statements, and verifying receipts and expenditures. Adequate procedures should be established for completing an audit trail that creates sufficient documentary (physical) evidence for each step in the flow of transactions within the activity fund.

20 Common Risks Related to Activity Funds No segregation of duties Controls to ensure that all monies collected in the classroom make it to the office Inadequate review of bank statement for unusual activity No control over adjusting journal entries (Bookkeeper has access) Sponsors do not review monthly financial reports for reasonableness (Ex. Band uniforms) Disbursements made prior to approval process

21 Fraud Statistics Source: Report to the Nations on Occupational Fraud and Abuse 2016 Global Fraud Study By Association of Certified Fraud Examiners

22 Distribution of Losses

23 How Occupational Fraud Is Committed

24 Asset Misappropriation Sub Schemes

25 Duration of Fraud Schemes

26 Duration of Fraud Schemes

27 Concealment of Fraud Schemes

28 Detection Method by Region

29 Median Loss and Median Duration by Detection Method

30 Source of Tips

31 Impact of Hotlines

32 Type of Organization

33 Level of Government Organization

34 Size of Organization

35 Industry of Organization

36 Anti Fraud Controls at Victim Organizations

37 Trends in the Implementation of Anti Fraud Controls

38 Effectiveness of Controls

39 Effectiveness of Controls

40 Internal Control Weaknesses That Contributed to Fraud

41 Internal Control Weaknesses That Contributed to Fraud

42 Perpetrator s Position

43 Perpetrator s Tenure

44 Perpetrator s Department

45 Perpetrator s Gender

46 Median Loss Based on Gender

47 Perpetrator s Age

48 Perpetrator s Education Level

49 Perpetrator s Employment History

50 Behavioral Red Flags Displayed by Perpetrators

51 Behavioral Red Flags Based on Perpetrator s Gender

52 Criminal Prosecutions

53 Criminal Prosecutions

54 Criminal Prosecutions

55 Questions? Thank you for your attention today. If you have any follow up questions, please do not hesitate to call or me. (540)