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Financial Controls

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  • 1. Financial Controls This document provides essential information about how to implement financial control within the constituent. It highlights the major responsibilities of the constituent board in the area of financial controls. Execution of these responsibilities will promote strong internal controls and improve the accuracy, timeliness, and completeness of financial reporting while minimizing the opportunity for fraud. On July 30, 2002, the Sarbanes-Oxley Act (SOX) was signed into law. This legislation was the direct result of numerous accounting scandals and fraud within several of America’s largest corporations. The law attempts to emphasize the importance of strong internal controls and to restore the public’s faith in business leadership and financial reporting. Strong internal controls are necessary to prevent, detect, and contain fraud. While this legislation does not apply to non-profit organizations currently, constituent leaders need to emphasize the importance as well as the proper execution of routine constituent accounting processes through strong internal controls. In addition for those constituents that conduct an annual audit of its financial statements, some aspects of SOX have been incorporated in new auditing standards applicable to non-public entities. Under the new audit process, auditors will: • Obtain a thorough understanding of their client’s information processing system. • Evaluate the design effectiveness of the controls over that system, and • Obtain detailed knowledge of their clients’ operations, their business objectives and strategies, and the risks to achieving these objectives • Test the internal control system Key Internal Control Objectives Three key areas are targeted to minimize the risk of fraud in constituents: 1. Authorization will ensure that proper “checks and balances” are in place so that all transactions are executed in accordance with approved roles and responsibilities. 2. Recording will ensure that all authorized transactions are properly recorded and reported in the correct time period to match revenues and expenses. 3. Compliance will ensure that Generally Accepted Accounting Practices (GAAP) are applied consistently. Financial Responsibilities of the Constituent Board The following checklist highlights the major responsibilities of the constituent board in the area of financial controls. Execution of these responsibilities will promote strong
  • 2. internal controls and improve accuracy, timeliness, and completeness of financial reporting while minimizing the opportunity for fraud. Role Responsibilities Board • Review and approve the annual budget. • Review significant expenditures, transactions, and/or budget variances. • Review annual audit findings. • Review annual tax filings. • Review and formally approve all gifts, grants, engagement fees, honorariums, etc. President and/or President-Elect • Review the annual budget. • Appoint the Audit Committee. • Conduct an annual review of the Audit Committee’s findings with the board. • Conduct a quarterly review of financial results with the board. • Conduct a quarterly review of all significant expenditures, transactions and/or budget variances with the board. President ONLY • Second signatory for all payments by check or credit card over $2,000. • Present all requests for gifts, grants, engagement fees, honoraria, etc. Secretary • Review the annual budget. • Be a member of the Audit Committee. • Participate in all Audit Committee meetings. • Conduct an annual review of the Audit Committee’s findings with the board. • Participate in all quarterly reviews of financial results. • Participate in all quarterly reviews of all significant expenditures, transactions and/or budget variances. • Review all cash disbursements. • Second signatory for all payments by check or credit card over $2,000. Segregation of Duties One key to proper internal control is to make certain that various financial responsibilities are assigned to different individuals, which ensures segregation of incompatible functions. This segregation of duties is intended to prevent a single individual from
  • 3. having both (1) access to any specific role or transaction and (2) the responsibility for maintaining accountability for a specific role or transaction. To illustrate: 1. If an individual processes payments to a vendor, then that individual should not review and authorize that payment. 2. If an individual can process vendor payments, then that individual should not have the ability to add, remove, and/or change vendors without written approval from a higher ranking member within the constituent. Some general questions to consider when determining whether appropriate segregation of duties exists in the constituent include: • Are transactions recorded and approved or reviewed by an individual who does not have unrestricted access to related assets? • Are there different individuals involved in (1) initiating a transaction; (2) funding the transaction; (3) recording the transaction; (4) reconciling and/or reporting the transaction; (5) writing off and/or discounting the transaction; or (6) adding, changing, or deleting master membership information? • Are there different individuals involved in (1) initiating a liability (e.g., purchase order or commitment); (2) funding the transaction; (3) recording the transaction; (4) reconciling and/or reporting the transaction; (5) writing off and/or discounting the transaction; or (6) adding, changing, or deleting master vendor information? • Are reconciliations performed and reviewed by individuals who do not have unrestricted access to cash? • Are different individuals involved in (1) impacting General Ledger Accounts; (2) reconciliation of those General Ledger Accounts; (3) preparation of financial statements; (4) analysis of the balance sheet and/or income statement? • Does the constituent have an annual independent review and formal reporting of the constituent’s segregation of roles and responsibilities? • Does the constituent have a means of communicating either internal or external fraud information upstream? General Key Process Control Questions For each control area, constituent leaders should identify the following: • Who performs the activity? • Who reviews the activity? • How is the activity monitored? • What is the frequency with which the activity is monitored? • Is the business process, flow, and control of the activity documented? • Have major risks associated with the execution, review, and documentation of the activity been documented?
  • 4. Process Controls for Financial Statements The purpose of financial statements is to consolidate, review, and communicate actual and budgeted information for a specific time period. The constituent treasurer or designee is responsible for producing and publishing these financial reports in a timely manner. Monthly or Quarterly Preparation and Review On a monthly or quarterly basis, the treasurer or designee should consolidate all transaction and produce financial reports. This procedure is core to GAAP and strong internal controls. Prior to presenting these reports to the board and Audit Committee, the treasurer is required to analyze all data. This will ensure a timely review of information and highlight any potential internal control or fraud issues. Material issues must be researched and resolved immediately and presented to the Audit Committee. Monthly Variance Analysis Each constituent should prepare an annual budget. It is critical that the treasurer review all major variances (actual versus budget) on a monthly basis. This analysis will highlight significant issues and allow the constituent to adjust its spending accordingly. The analysis will provide a valuable tool to use in preparing the next year’s budget. The treasurer should present a formal variance analysis to the board and Audit Committee on a quarterly basis. Process Controls for Accounts Payable Duty Responsibility Approval Special Notes Frequency Create bank Treasurer President accounts Create a vendor Treasurer Treasurer Treasurer As received written should review authorization vendor information and payment terms before the first payment is processed Modify or Treasurer Treasurer Check for As received delete a vendor written potential tax authorization (W2) implications before changing or deleting Initiate Treasurer Treasurer Recommend As received purchase written two signatures request authorization on all items over $2,000 Receipt of Requestor As received goods/invoice approval
  • 5. Process Controls for Accounts Payable (cont.) Duty Responsibility Approval Special Notes Frequency Matching Treasurer As received purchase request to signed receipt Prepare check Treasurer Constituent Per invoice officer and/or initiator’s signature is required Change an Treasurer Treasurer As required invoice quantity written or $ amount authorization Invoice filing Treasurer In accordance Ongoing with record retention policy Check/voucher Treasurer Audit Monthly reconciliation Committee Review, Treasurer and Checks up to Ongoing authorize, or secretary, $2,000 require sign checks secretary and one signature, president, checks over treasurer and $2,000 require president two signatures Mail checks Treasurer None Ongoing Process Controls for Accounts Receivable Duty Responsibility Approval Frequency Create bank accounts Treasurer President As needed (cash, web, or credit card) Establish and Treasurer As received maintain constituent membership Record receivables Treasurer Treasurer As received should review Record cash receipts Treasurer Treasurer Daily should review
  • 6. Process Controls for Accounts Receivable (cont.) Duty Responsibility Approval Frequency Create bank deposits Treasurer Treasurer Daily should review Deposit cash Treasurer Treasurer Daily should review Record credit card Treasurer Treasurer Daily receipts should review Record receipts to Treasurer Treasurer Daily Accounts Receivable should review ledger Reconcile bank Treasurer Audit Committee Monthly accounts—cash and should review credit card deposits Reconcile/review Treasurer Audit Committee Monthly Accounts Receivable should review ledger Process Controls for Investments and Debt Key responsibilities of the board and the Audit Committee are communication, authorization, and control of all investments and incurring of debt. Due to potential exposure to the constituent, no single individual is allowed to transfer or delegate authorization to any other constituent leader or staff. It is imperative that both the president and the Audit Committee review and approve all proposals for investments or debt prior to their incurrence. If a constituent has investments, it should develop an investment policy. The investment policy outlines and prescribes a prudent and acceptable investment philosophy and defines the investment management procedures and long-term goals for the constituent. A written policy will help the constituent to maintain a long-term policy when short-term market movements may be distressing. To develop a policy, a constituent should assess its financial condition, set goals, develop a strategy to meet those goals, implement the strategy, review investment results, and adjust the strategy or implementation as circumstances dictate. The policy should outline the following: • Scope • Investment objectives (includes risks, liquidity, and yield) • Standards of care (prudence, ethics and conflicts of interest, delegation of authority, and checks and balances) • Investment transactions (internal controls, authorized financial dealers and institutions, eligible investments, restrictions, and prohibited transactions) • Investment parameters (portfolio diversification, maturity limits, and portfolio management) • Performance review and reporting
  • 7. • Recordkeeping and safekeeping • Policy considerations (exceptions, revisions, and adoption)

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