❘❙ Club Accounting ❙❚
INTERNAL CONTROLS? THIS IS A CLUB!
HOW ABOUT “COMPENSATING” CONTROLS?
The reality for mitigating risk in smaller-staffed operations is a
system of controls that review completed transactions
By Jeff Sackman, CPA
M
ove on if you have never
heard this before; “there is a
lack of segregation of duties
within your accounting department.”
If your club receives an audit, most
likely your accounting firm issues this
statement in a management letter, but
fails to give realistic solutions beyond
the implied hiring of more employees.
Few clubs are willing to do “less with
more” and hire more accounting personnel. The reality is that clubs rarely
have enough resources to rely solely
on the principle of adequate segregation of duties. So, what now?
Let’s take a step back and understand why your accounting firm issues
such a statement and what it means.
Then we can begin to address the
issue with solutions you can actually
implement.
Auditors’ Responsibilities
Contrary to popular belief, it is not an
auditor’s responsibility to find fraud.
In fact, fraud is detected less than 5
percent through an external audit.
Auditors must consider and obtain an
understanding of the club’s internal
control over financial reporting (internal control) as a basis for designing
their audit procedures, but not for the
purpose of expressing an opinion on
the effectiveness of the club’s internal
control. In addition, their consider-
ation of the club’s internal control is not designed to identify all deficiencies in
internal control. If the auditor identifies deficiencies, they are required to determine the level of the deficiencies and communicate them to management. Thus,
if your club lacks an adequate segregation of duties, it is considered a deficiency
and is communicated in a management letter as a deficiency, significant deficiency or a material weakness.
What Does It Mean?
So, now you understand why the club’s accounting firm issues the statement,
but what does it mean? There are two types of control activities which ensure
management’s directives regarding operation and financial reporting of the club;
preventative controls and compensating or detective controls.
Jeff Sackman is a CPA and manager-in-charge of RubinBrown’s Private Club segment. He also participated as a speaker at the 2012 HFTP Club & Hotel
Controllers Conference in Baltimore, Md.
14
August/September 2012
❘❙ Club Accounting ❙❚
Just as it states, preventative
controls are designed to “prevent”
an event from occurring. If adequate
staffing levels exist, preventative
controls are more desirable because of
their potential ability to catch a problem before it even starts. Segregation
of duties is considered a preventive
control because it prevents an event
from occurring rather than discovering
the error after-the-fact. Ideally, there
should be at least two individuals involved with every financial transaction
before it occurs to ensure adequate
review for accuracy and reduce the
risk of impropriety.
Absent an adequate segregation
of duties, the control environment is
compromised and compensating controls must be incorporated to ensure
transactions are being monitored for
accuracy and propriety. Compensating
controls are less desirable then segregation of duties because they generally
occur after the transaction is complete;
however, in the club industry, compensating controls are the reality.
Absent an adequate segregation of duties,
the control environment is compromised and
compensating controls must be incorporated
to ensure transactions are being monitored
for accuracy and propriety.
Cash Disbursements and
Accounts Payable
In a typical club accounting environment, the same employee is most
likely maintaining the vendor master
file, processing invoices, printing
checks and mailing the checks after
they are signed. In some cases, the
same employee even has check signing authority. There are a multitude
of things that can go wrong in this
scenario, including creation of fictitious vendors which is one of the top
five common frauds committed in
business. Some compensating controls
that help mitigate the risks in the areas
of cash disbursements and accounts
payable include:
s Independent approval of new vendor entries;
s Dual signature policy;
s Independent receipt and review of
bank statement (or online activity);
s Independent review of bank reconciliations;
s Independent review of vendor edit
reports;
s Password and/or call-back verification for wire transfers and line-ofcredit draws; and
❘❙ Club Accounting ❙❚
s Independent spot checks of petty
cash and the related supporting
documentation and reconciliation.
Cash Receipts
Cash receipts are also just as susceptible to fraud as disbursements if
the same employee processes member billings, receives and processes
member payments, and issues member
credits. If one employee performs
these duties, that individual is in a position to divert cash for their personal
benefit. Some compensating controls
that help mitigate the risks in the area
of cash receipts include:
s Use of a lockbox;
s Immediate restrictive endorsement
of all checks received by someone
independent of the related accounts
receivable functions;
frauds committed in business, which
is the creation of fictitious employees.
Other risks include adjustment of payroll rates, altering seasonal employee
information and issuing bonuses that
weren’t authorized. Some compensating controls that help mitigate the
risks in the area of payroll include:
s Independent authorization and approval of hours and pay rates;
s Independent approval of vacation
and sick leave;
s Independent review and approval
of payroll;
s Periodic, independent distribution
of employee checks/direct deposit
stubs;
s Consider sending third party payroll reports electronically (directly)
to management for review and
inquiry; and
The pro shop can be your best help in ensuring
your club is accounting for (and collecting on)
all of its golf activities. Requiring members
to check-in at the pro shop gives the club
the opportunity to verify the greens fee and
cart rental, and it also improves traffic and
merchandise sales.
s Independent reconciliation of
checks received and deposited;
s Independent review and approval
of all member credits issued; and
s Reconciliation of cash bars (collections) with the related inventory
consumption.
Payroll (In-house)
Many clubs process payroll in-house
as opposed to outsourcing the process,
thus, one employee typically maintains the employee master file, processes payroll, and prints the checks
or submits the direct deposit. In some
cases, the same employee even has
check signing authority or uses a signature stamp. Among the many risks
here is another of the top five common
16
August/September 2012
s Independent review of employee
edit reports.
Inventory
If one individual is in charge of
purchasing, receiving and performing
the physical count of inventory, that
individual could be having five-star
meals at home every night or playing
with the newest golf equipment every
week. Here are some compensating
controls to help mitigate the risks in
the area of inventory:
s Periodic, independent spot checks
of inventory items being received
during the delivery process;
s Independent review and spot
checks of the regular physical
inventory count;
s Independent approval of all modifications to perpetual inventory
records; and
s Quantify and investigate all discrepancies (i.e., demo clubs, writeoffs, missing inventory, etc.).
Pro Shop Considerations
The pro shop can be your best help in
ensuring your club is accounting for
(and collecting on) all of its golf activities. Requiring members to checkin at the pro shop gives the club the
opportunity to verify the greens fee
and cart rental, and it also improves
traffic and merchandise sales. The
electronic tee sheet could then be sent
to accounting daily to be reconciled
with the actual greens fees and cart
rentals billed to the members.
The club should also consider using a starter to aid in verifying greens
fees and cart usage. Not only would a
starter help the accounting department
track proper billings, but they would
also help to regulate the pace of play
and greet members and their guests at
the first tee.
Loaning equipment to members
is also a common practice in the pro
shop. Loaned equipment promotes
potential sales of merchandise and
creates goodwill with members and
their guests; however, the items are
often “lost” and not returned. One
practice to consider might be billing the member’s account (or credit
card) upon loaning the equipment and
crediting the account upon return of
the equipment. The pro shop should
also verify the equipment returned is
the same that was issued.
Do More With Less
There is no question that lack of an
adequate segregation of duties is an
issue for most clubs. Hopefully your
club decides to address the issue by
implementing some of the compensating controls outlined above to mitigate
the club’s risks. Not taking any action
to mitigate the club’s risk could be
disastrous. Although this is not a new
issue for clubs, coincidentally, you're
being tasked with today’s motto in
business, “do more with less.” ■