4/12/2016
Patti Schroeder, Finance Support Director at
Iowa Association of School Boards (IASB)
and Iowa ASBO member
Information
you can use to
address Internal Control within
your school district.
Introduction
to Iowa’s booklet:
Segregation of Financial Duties in
the Smaller Public School to Improve
Financial Internal Controls. (Iowa’s story)
 SBO/CFO/Entity
requests
 DOE/Federal Government
 Audit Reports
 Insurance
 Fraud cases
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4/12/2016

Many, many audits have
segregation of duties comments:
Cash
Wire Transfers
Receipts
Disbursements
Payroll
School Lunch Program
Financial Reporting
When segregation of duties cited, it
is always labeled as a:
Material weakness
That is, internal control is weak,
misstatements could occur and not
be detected and corrected in a
timely basis



huge
Insurance companies have had a
amount of
bond losses, due in large part to lack of proper
segregation of duties.
not
As a result, Iowa insurers will
increase any
bond limits on any Iowa school until proper
segregation of duties has occurred.
Proper segregation of duties will only be increased
once improper segregation of duties
no longer
appears as a material or significant finding on
a school district’s audit.
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4/12/2016
School District: Two losses from same occurrence, one an
employee theft loss for $510,000 and the other a faithful
performance loss for $500,000.
Business office supervisor deposited checks received into an
unapproved checking account and numerous unapproved CD’s
that were opened by and controlled by the thief. District
officials had no knowledge of the checking account or CD’s.
Insured suffered total loss of more than $1,200,000.
Insurance Carrier said:
This loss largely caused by inadequate segregation
of duties, little internal controls, poor documentation of
checks received by the district, and inadequate supervision
by supervisor (District Treasurer).
Setting An Employee Dishonesty Limit
The Surety Association of America, an organization which compiles
employee dishonesty premium and loss data, has published a guide to help
select minimum bond limits. It is worth using this as a guide when your
district is selecting an employee dishonesty limit.
“Exposure factor = 20% of current assets plus 10% of annual revenue.
The principal current asset of a school district is cash.
Example: $ 2,000,000 cash in the bank
$25,000,000 in annual revenues
Exposure factor = (.2 x 2,000,000) + (.10 x 25,000,000) = $2,900,000.
An exposure factor of $2,900,000 results in a minimum bond limit in the
$200,000 to $300,000 range.
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9
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4/12/2016
Undeposited collections
Unauthorized cash withdrawals
Set up separate bank account, diverted district
funds:
• From summer softball camps
• From the football program
Made personal expenditures from bank account
Charged personal purchases to district issued
procurement card
Paid out unauthorized (perhaps unincurred)
overtime
 “Her
bosses made it easy.”
 “Maybe
we were naïve in counting
on one person to look after the
accounts.”
 Without
that documentation, you
can’t tell specifically what was
purchased.”
 61%
- undeposited collections
 55%
- improper purchases from vendors
 37%
- payroll / extra pay
 31%
- improper reimbursements
 21%
- improper credit card payments or
purchases
 14%
- cash withdrawals
Mary Mosiman, CPA, Iowa Auditor of State
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4/12/2016

Frequent cash collections

Limited administrative and other personnel

Lack of segregation of duties


Lack of oversight – blind trust / failure to be
involved by governing body
Perception “money is unlimited” compared to
employee’s finances
Mary Mosiman, CPA, Iowa Auditor of State
Year
Number of Claims
Dollars of Loss
1993
1
$34,899
1994
1
22,125
1995
0
0
1996
0
0
1997
1
1,462
1998
1
629
1999
3
3,544
2000
0
0
2001
3
3,401
2002
5
59,500
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Year
Year
Number
Numberof
ofClaims
Claims
Dollars of Loss
2003
2003
22
$217,227
2004
2004
44
$52,852
2005
2005
12
12
69,875
2006
2006
14
14
159,930
2007
2007
14
14
263,190
2008
2008
16
16
194,981
2009
2009
11
11
154,623
2010
2010
12
12
1,919,481
2011
2011
12
12
209,569
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4/12/2016
Year
Number of Claims
Dollars of Loss
2012
9
$183,820
2013
16
$107,459
2014
2015
15
7
$ 96,622
$ 24,669
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No single person should have
control over two or more phases of
a task, process or transaction
OR another way to say that is…
More than one person should be
required to complete any task
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Greater
Find
accuracy
errors quickly
Deter
mismanagement/fraud
Provide
checks & balances
Protect
DISTRICT and SBO/CFO!
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4/12/2016
Access
(to Assets)
Custody, control or handling of asset :
• Cash; checks; receipts; deposits; credit cards; safes;
lock boxes
• Equipment; receipt of new purchases; inventories
• Paychecks /vendor checks - printing or distribution
Authorization
Reviewing and approval of task or transaction or
operation such as approval of:
Accounting
•
•
•
•
•
•
•
•
Bank account adjustments or transfers;
purchase orders or requisitions;
use or disposition of an assets;
changes in pay or benefits;
timesheets or leave requests;
change orders;
IT programming changes;
adjusting journal entries
• Creating or maintaining records, such as cash
receipts, requisitions
• Maintaining inventory records
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Comparison or review of transactions:
• Timely bank reconciliations
• Surprise petty cash counts
RECONCILIATION • Timely review of IT edits – new
RECONCILIATION
employees; benefits; new vendors
RECONCILIATION
RECONCILIATION • Comparison of goods received to
what was ordered
• Payroll and benefit reconciliations
• Physical inventory and
reconciliation
• Comparison of accounting records
to reports
• Analytical review
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1. Drafted “best practice” templates
on segregation of duties for a:
One person Business Office
Two person Office
Three person Office
2. Then asked Committee of
“Auditor-types” to review, provide
suggestions… but not bless.
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4/12/2016
Member
Johna Clancy
Jill Gavin
Sue Huls
Patti Schroeder
Shonna Trudo
School District
Gilbert (now Indianola)
Martensdale-St. Marys
Sigourney
Iowa Assn. of School Boards
Van Meter
Organization/School
District
Member
Pam Bormann Iowa State Auditor’s
Andy Nielsen Office
Mary Babinet Nolte, Cornman &
Johnson, PC
Kevin Baccam Southeast Polk Schools
Ryan Eidahl
Saydel Schools
Kristy Weiss
Northeast Schools
Access
Authorization
Accounting
(Reconciliation)
Duty/
Transaction
Step
Person(s)
Responsible for
Duty/Step
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4/12/2016
PETTY CASH, CASH IN BANK, INVESTMENTS
SEGREGATION OF DUTIES
MODEL – ONE PERSON OFFICE
DUTY
SBO
Access
Initiates request to open/close
bank/investment accounts and public
depositories
Authorization Approves/signs off on opening/closing
of bank/investment accounts and public
depositories
OUTSIDE
NONBUSINESS OFFICE DISTRICT
EMPLOYEE
X
X
Board
PETTY CASH, CASH IN BANK, INVESTMENTS
SEGREGATION OF DUTIES
MODEL – TWO PERSON OFFICE
DUTY
SBO
Access
Initiates request to open/close
bank/ investment accounts and
public depositories
Authorization Approves/signs off on
opening/closing bank/investment
accounts and public depositories
PERSON
2
OUTSIDE
BUSINESS
OFFICE
NONDISTRICT
EMPLOYEE
X
X
Board
PETTY CASH, CASH IN BANK, INVESTMENTS
SEGREGATION OF DUTIES
MODEL – THREE PERSON OFFICE
DUTY
Access
Authorization
Initiates request to
open/close bank/investment
accounts and public
depositories
Approves/signs off on
opening/closing
bank/investment accounts
and public depositories
SBO PERSON PERSON OUTSIDE
NON2
3
BUSINESS DISTRICT
OFFICE EMPLOYEE
X
X
Board
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4/12/2016
Size of
Business
Office
SBO
Person
2
One
Person
X
Two
Person
X
X
Three
Person
X
X
Examples
Person
3
Outside Business
Office
NonDistrict
Employee
X
X
X
X
Superintendent,
Principal,
School secretary,
Supt’s secretary
IT person
Treasurer
( or designee
X
outside
Business
Office)
Board
Member
1 STUDENT ACTIVITY FUNDS – GATES/ADMISSION FEES
2 CASH/PETTY CASH/CHANGE FUNDS/CASH IN
BANK/INVESTMENTS
3 RECEIPTS/REVENUES/RECEIVABLES
4 DISBURSEMENTS/EXPENDITURES/PAYABLES /
PURCHASING/CREDIT CARDS
5 PAYROLL
6 FINANCIAL REPORTING
always have at least
two people involved; but not
 Should
always the same two people
 Consider
periodically
contacting local banks for
entities using district name or
federal tax ID
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4/12/2016



Who receives bank statements and
performs bank reconciliation is
crucial!
Let bank(s) know who is authorized to
do what – insist on dual authorization
of all bank/wire transfers
Consider “citizen” Treasurer
 All
checks should be stamped
immediately “For Deposit Only”
 Initial
listings of receipts should
be made before cash/check is
handed off to another person
and matched to deposit




Limit the number of staff with ability to
authorize purchases and/or credit card
charges.
Authorization should be separate from
ordering and receipt of goods and services.
Limit access to credit cards to only the
authorized holder/user of the credit card.
Who receives bank statements and performs
bank reconciliation is crucial!
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4/12/2016
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



Should have a clear segregation of HR (hiring,
salary rate setting, benefit changes) and
Payroll functions.
Let bank know who is authorized to do what –
insist on dual authorization of all bank/wire
transfers
Have someone who is not involved in HR or
Payroll receive, distribute and/or mail all
payroll checks.
Better yet, insist on direct deposit for all
employees!
Access to assets should not be necessary
when preparing financial reports.
Reports should be prepared by someone
who does not have access to assets, nor
does the daily accounting.
AND/OR

Critical analytical review should be done by
someone who did not prepare the reports.
Must
look outside Business Office for
leverage:
Superintendent
Clerical assistance
IT personnel
School Building personnel
Treasurer (or designee outside the Business Office)
Board members
Others
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4/12/2016


Maximize use of technology!
On-line fees payment system
Direct deposit for all employees
District only credit cards
Limit access to all accounting, banking,
payroll, purchasing and programming to
only those with a legitimate need for access

Limit SBO /CFO access as well

Review Insurance coverage
How Will Insurance Coverage Help?
(example)
1) Faithful Performance (or really lack thereof) is a covered
cause of loss
2) Must be able to prove the loss i.e. document what is gone, not just illustrate that we
have less than we should have had.
3) It must be a covered cause of loss, not just bad
behavior.
Paying for your daughter’s wedding with the corporate
credit card was covered.
Paying his wife a fee for lavishly decorating his office was
not covered.
4) Money for external costs to establish a proof of loss
is often covered.
EMC pays up to $10,000 based on the size of the loss.
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
Investigate
every
anomaly:
◦ “We bought a DVD and my check never got cashed…”
◦ “My daughter paid for a shirt - never got a shirt..”

Ask your auditor for advice!
◦ “Specifically, how can we change how we are doing a
certain transaction cycle to make it even stronger?”
“Will it erase the comment in our audit?”
◦ “Can you review all expenses related to…
Superintendent, SBO, HR Director…”
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4/12/2016
Contact IASBO Assistant
Director, Nancy Blow at:
[email protected]
to purchase and mail you a
booklet ($10) or to PDF you a
copy at no cost!
Thanks!!
[email protected]
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