Many times problems arise at governmental entities due to the lack of appropriate internal controls or failure to follow already established internal controls. Here are two particular instances discovered when assisting government entities with internal audit and fraud investigations.City X – City X did not have internal controls established to ensure that recreational league fees paid to the parks department were properly safeguarded, accounted for and deposited.
Bank Internal Controls Audit
The city parks director collected these fees and was responsible for depositing them into the city bank account – without any additional oversight. As a result, the city parks director was able to steal approximately $15,000 over a three-year period in fees paid by residents for recreational leagues.City Y – City Y had established internal controls that were documented in its policies and procedures manual, over the drawdown of federal grant funds it was owed. However, the manual was seldom referred to and eventually forgotten over time. So, City Y was actively looking into finding out why they had failed to draw down in a timely manner more than $6 million in federal funds owed.
It was discovered that an accountant, who had been hired in the past year, was not told about the controls established and documented in the policies and procedures manual, making the internal controls a moot point.These are just a couple of examples that show the need to document internal controls. This article will define what internal controls are, discuss why a manual is critical for local government, and outline the steps to develop a manual and the related components.Internal ControlIt is crucial to define what internal control is before delving any further into the topic of an internal control manual. The best and most widely accepted definition of internal control comes from the Committee of Sponsoring Organizations of the Treadway Commission (COSO) that was founded in 1992 and issued the Internal Control Integrated Framework.COSO defines internal control as:“A process, effected by an entity’s board of directors, management and other personnel. This process is designed to provide reasonable assurance regarding the achievement of objectives in effectiveness and efficiency of operations, reliability of financial reporting, and compliance with applicable laws and regulations.”This definition translates well to local government entities by simply replacing “board of directors” with “elected officials” in the first line above. The definition also focuses on the fiduciary responsibilities of local government entities to ensure the effectiveness and efficiency of operations, reliability of financial reporting and compliance with applicable laws and regulation.Why Develop An Internal Control ManualGovernment officials are accountable to the public. They have been entrusted with four main fiduciary responsibilities. The first is the responsibility to comply with all federal, state and local laws and regulations.
The second is the responsibility to properly handle and safeguard public funds. Their third responsibility is to operate in an efficient and effective manner. Finally, government officials are responsible for achieving results.The Government Finance Officers Association (GFOA) recommends that every governmental entity document accounting policies and procedures in order to enhance accountability and consistency.