The Audit as a Management Tool


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  • Good Morning – I’m etc. The topic this morning is The Audit as a Management Tool. Before we get started - Could I have a show of hands – which of your towns have or have had an outside independent audit ? OK, everyone whose town does not have an audit is excused No - Just kidding – please stay for some really useful stuff
  • An independent examination – full scrutiny and verification of accounting records - revenue, disbursements, bank records, etc. They look at more than financial information – the also look at Policies and operating procedures Internal controls They report what they find- The Audit Report Remember – you don’t have to have an audit to review your policies & controls to insure an efficient, effective and transparent government - an audit committee or other over-sight committee could serve that function
  • They well tell you what they found wrong or not being done as well as it could be done They will tell you how to correct it The audit report is a road map to a more efficient, effective and transparent town government
  • Incorrect postings to the general ledger resulting in incorrect reports and the need for adjustments Errors in bank and general ledger reconciliations Failure to segregate duties – poor cash management No policies and procedures in place Policies in place – not followed Poor grant management
  • The auditor will tell you what he finds wrong as he examines your books, records, policies and procedures – a finding The auditor should be discussing with you his finding as the audit progresses. If they don’t - initiate the discussion yourself Don’t wait for the management letter- talk to the auditors during the audit – discuss what they are finding – push back if they have missed or misinterpreted something Be sure you understand the finding – and their recommendation to correct it – discuss it with the auditor Take the corrective steps required – see above
  • Establish policies and procedures to meet the needs and objectives of your town: to provide needed services as efficiently and effectively as possible with as little stress as possible Institute controls to insure the policies and procedures are carried out We should have a discussion about Audit Committees – every town should have one – Perhaps a topic for another day
  • Here are some typical policies we recommend you develop. Remember – the policies should meet the needs and objectives of your town Policies and procedures are the responsibility of the management – with input from others Remember a few slides back – Do you need an audit committee - This may be a need that an audit committee could help address
  • Are everyday dealings with towns people, the treasurer, clerk, auditors and listers based on honesty and fairness? Is appropriate remedial action taken when policies, procedures or the code of conduct are not followed? Are these actions communicated throughout the entity? Does management document or investigate deviations from established controls? Enron had an award winning “ethics policy” – But not the required controls – you need both
  • No town is too small for a conflict of interest policy –In fact the smallest towns have the greatest potential for conflict of interest situations A public official should always work toward the public interest and not toward private or personal interests Not engage in any private business, transaction or employment not compatible with his/her duties and responsibilities to the town Disclose information without authorization Grant or influence the granting of favors not in the best interest of the town Williston example
  • Participate in any activity or decision which benefits themselves, family, friends or business associates Make personal use of staff, vehicles, equipment or other town resources Appoint/hire family members, friends, etc. Accept trips, gifts, work on your property or any thing else that could be seen as a conflict of interest
  • Removing the conflict is the easiest way to mitigate the conflict Disclose in an open public meeting the nature of the conflict and do not participate in any discussion or vote on the issue This prohibitation does not prevent the official from testifying concerning the factual matters at a Selectboard, or other town meeting – but – you should not advocate a position on the matter Establish a code of ethics or conflict of interest policy which clearly defines what is a conflict of interest and how any conflicts of interest shall be addressed Recusal
  • Good policies and procedures are essential to effective management of any town, business or organization They provide guidance and eliminate confusion when questions arise – confusion is often the cause of most problems There are many examples available to help you develop one that fits and meets the needs of your town. Pick one – modify it to your needs – and be sure to evaluate how well it is working and adjust it if needed handout
  • Internal Controls must make sense – must fit your unique operating environment They don’t stand alone – they are part of your day-to-day responsibilities They should be cost effective Effective internal controls could have prevented the financial disasters of Enron, Tyco and World Com When the Enron disaster started unfolding, I wondered “how could this happen in a major corporation that was traded on the stock exchange, with a board of directors, multiple layers of management and an annual audit The simple answer is that they did not have effective internal controls in place to prevent it Mention their ethics policy again
  • The standard definition is: read it They are simply the rules, the checks and balances you put in place to unsure that the policies management established are carried out I have an internal control check list here of 77 questions to help you assess if your town has adequate controls in place – no answers suggests that you may have a control weakness in that area
  • That’s that “tone at the top” thing What activities have the greatest potential for risk to the town – rank them – address them with controls What do we do to control or reduce those potential risks Talk to each other – discuss issues Who’s checking, and how are we checking to make sure those control activities are being done and that they are working
  • Does management convey by their actions that they have the town’s best interest at heart ? Do they provide the tools and training needed for other officials and employees to effectively do their jobs? Do they want to “get it right” or is “good enough for government work” more their philosophy? Do they provide clear direction – follow up? Does management have written policies and have they followed them?
  • What are the transactions and operations that present the most risk to the town or town officials? Examples: Cash management Personal Policies Identify the potential risks in each operation – design controls to eliminate or reduce the risk
  • Effective policies and controls protect against fraud, waste and abuse No payments without the proper authorizations and approvals It’s Ok to trust – but please verify and reconcile To me the most important control is the segregation of duties – the same person should not receive payments, make the deposits, enter the transactions, and write the checks. This protects you as much as it does the town Review your town operations to be sure they are achieving your goals/plan
  • You can’t run anything – a town – a business –or your own family finances without regular, readable and reliable financial statements At a minimum - monthly reports to the board of actual to budget Department heads should get the same info for their departments Someone should be responsible for all grant financial management and reporting Talk to each other !!
  • You have to know how you are doing financially (Actual vs. Budget) - and also how you are doing vs. the operation plan for all town activities Reconcile Review – make sure the controls works as expected or desired Adjust and correct A U D I T
  • The Audit as a Management Tool

    1. 1. The Audit as a Management Tool Vermont State Auditor’s Office – April 2009
    2. 2. What is an Audit <ul><li>Inspection of Accounting Records and other procedures to check their accuracy, completeness, and reliability </li></ul><ul><li>Independent process </li></ul><ul><li>Results in a report </li></ul>
    3. 3. The Audit Report <ul><li>Audit Findings </li></ul><ul><li>Corrective action required </li></ul><ul><li>A management opportunity </li></ul>
    4. 4. Audit Findings – What Are They? <ul><li>Financial misstatement </li></ul><ul><li>Control weakness </li></ul><ul><li>Policy or other rule violations </li></ul><ul><li>Other issues identified during the audit </li></ul>
    5. 5. How To Get Rid of Them <ul><li>The Management Letter – read it and talk to your auditor </li></ul><ul><li>Understand the problem </li></ul><ul><li>Understand the recommended corrective action </li></ul><ul><li>Plan the corrective action steps </li></ul><ul><li>Assign overall responsibility </li></ul><ul><li>Assign specific action step responsibilities </li></ul><ul><li>Establish a time line </li></ul><ul><li>Follow up – sustained attention </li></ul><ul><li>Verify completion and effectiveness </li></ul><ul><li>Report to management </li></ul>
    6. 6. How to Avoid Audit Findings <ul><li>Establish Policies and Procedures </li></ul><ul><ul><li>Ethics </li></ul></ul><ul><ul><li>Conflict of Interest </li></ul></ul><ul><li>Institute Internal Controls </li></ul><ul><ul><li>Financial </li></ul></ul><ul><ul><li>Operational </li></ul></ul><ul><ul><li>Compliance </li></ul></ul><ul><ul><li>Cash Management </li></ul></ul><ul><li>Do you need an Audit Committee </li></ul><ul><ul><li>A future discussion </li></ul></ul>
    7. 7. Policies and Procedures <ul><li>Ethics </li></ul><ul><li>Conflict of Interest </li></ul><ul><li>Personnel </li></ul><ul><li>Financial Management </li></ul><ul><li>Procurement </li></ul>
    8. 8. Ethics Policy <ul><li>Issues to Address </li></ul><ul><ul><li>What is a conflict of interest? </li></ul></ul><ul><ul><li>Accepting gifts or favors </li></ul></ul><ul><ul><li>Appointment and supervision of family and/or friends </li></ul></ul><ul><ul><li>Influence over subordinates </li></ul></ul><ul><ul><li>Use of confidential information </li></ul></ul><ul><ul><li>When to recuse </li></ul></ul><ul><ul><li>How to address complaints/potential violations </li></ul></ul>
    9. 9. Conflict of Interest <ul><li>A situation where someone in a position of trust or responsibility has competing professional or personal interests </li></ul><ul><li>A conflict of interest exists even if no improper or unethical act results from it </li></ul><ul><li>A conflict of interest can create an appearance of impropriety that can undermine confidence and trust </li></ul>
    10. 10. Types of Conflict of Interest <ul><li>Self Dealing </li></ul><ul><li>Family Interests </li></ul><ul><li>Gifts or favors from individuals doing business with the town </li></ul>
    11. 11. Ways to Mitigate Conflict of Interest <ul><li>Removal </li></ul><ul><li>Disclosure </li></ul><ul><li>Recusal </li></ul><ul><li>Third-party evaluations </li></ul><ul><li>Code of ethics </li></ul>
    12. 12. Personnel and Other Policies <ul><li>Write them </li></ul><ul><li>Follow them </li></ul><ul><li>Review and up-date them as needed </li></ul>
    13. 13. Internal Controls <ul><li>Effective internal controls prevent fraud, waste, and abuse </li></ul><ul><li>So….. Develop internal controls to address the risks identified during your “risk assessment process” </li></ul><ul><li>Review and adjust your control activities to ensure they are working </li></ul>
    14. 14. What are Internal Controls <ul><li>A process designed to provide reasonable assurance about the achievement of an entity’s objectives concerning: </li></ul><ul><li>Financial reporting </li></ul><ul><li>Effectiveness of operations </li></ul><ul><li>Compliance with laws and regulations </li></ul>
    15. 15. Five Elements of Internal Controls <ul><li>Control Environment </li></ul><ul><li>Risk Assessment </li></ul><ul><li>Control Activities </li></ul><ul><li>Information and Communication </li></ul><ul><li>Monitoring </li></ul>
    16. 16. Control Environment <ul><li>Tone at the Top </li></ul><ul><li>Commitment to Competence </li></ul><ul><li>Management’s Philosophy/Integrity </li></ul><ul><li>Management’s Direction/Assignment of </li></ul><ul><li>Responsibility </li></ul><ul><li>Human Resources Policies and </li></ul><ul><li>Procedures </li></ul>
    17. 17. Risk Assessment <ul><li>Identify the Risks to Achievement of the Town’s Objectives in relation to: </li></ul><ul><li>Financial Reporting </li></ul><ul><li>Cash Management </li></ul><ul><li>Town Operations </li></ul><ul><li>Compliance with laws and regulations </li></ul><ul><li>Prioritize them (Probability X Impact) </li></ul><ul><li>Develop a plan to manage them </li></ul>
    18. 18. Control Activities Specific to your operation and may include the following: <ul><li>Policies and procedures to protect against fraud, waste, and abuse </li></ul><ul><li>Authorizations and approvals </li></ul><ul><li>Verifications </li></ul><ul><li>Reconciliations </li></ul><ul><li>Segregation of duties </li></ul><ul><li>Review operational performance </li></ul>
    19. 19. Information and Communication <ul><li>Financial Reporting </li></ul><ul><li>Operational Reporting </li></ul><ul><li>Accounting Manual </li></ul><ul><li>Compliance Reporting </li></ul><ul><li>Codes of Conduct </li></ul><ul><li>Keep the communication lines open </li></ul>
    20. 20. Monitoring <ul><li>Budget to Actual </li></ul><ul><li>Internal Audits </li></ul><ul><li>Reconciliations to General Ledger </li></ul><ul><li>Management review of controls </li></ul><ul><li>Review of exception reports </li></ul><ul><li>External Audit </li></ul><ul><li>Audit Committee </li></ul>