Short presentation on 'internal controls for the class IPOL 8530 'The Finance Function' in Social Change Organizations'. This class is part of the Master of Public Administration (MPA) program in the Graduate School of International Policy & Management at the Monterey Institute of International Studies (MIIS). Presentation created by Alfredo Ortiz Aragón, adjunct professor.

1. IPOL 8530—Spring 2010 The Finance Function in Nonprofit & Public Organizations Alfredo Ortiz

2. Policies and procedures—Internal controls Increasing transparency and safeguarding assets 2 MIIS--IPOL 8530, "The Finance Function in Social Change Organizations"

3. Reasons for internal controls 3 Mostly on the governance side of things Safeguard the assets of the organization Prevent unintentional misstatements of accounts and reports Run the business efficiently, with rules that work, and apply to everyone (consistency) Create an environment of stewardship and accountability Compliance with laws and regulations MIIS--IPOL 8530, "The Finance Function in Social Change Organizations"

4. Caveats for internal controls Provides reasonable, not absolute assurance that objectives will be met Reasonable assurance should provide appropriate balance between risk and level of control—controls must always be gauged to respond to the actual level of risk. Stronger controls for higher risk levels and fewer controls for lower risk levels. Cost/benefit? But… Policies & procedures around internal controls must first be balanced to fulfill their control need. 4 MIIS--IPOL 8530, "The Finance Function in Social Change Organizations"

5. Internal Control per A-133 5 A process, effected by an entity's management and other personnel, designed to provide reasonable assurance regarding the achievement of objectives in the following categories Effectiveness and efficiency of operations; Reliability of financial reporting; and Compliance with applicable laws and regulations MIIS--IPOL 8530, "The Finance Function in Social Change Organizations"

6. Questions To Ask When Identifying Risk What assets do we need to protect? Where are we particularly vulnerable? What could go wrong? What activities are regulated by the government? What’s our greatest legal exposure? How do we protect our reputation? 6 MIIS--IPOL 8530, "The Finance Function in Social Change Organizations"

7. Common Areas of High Risk Procurement Equipment Petty cash Travel Payroll 7 MIIS--IPOL 8530, "The Finance Function in Social Change Organizations"

8. Internal controls 8 Our internal controls processes should address the following: The control environment Risk Information and communication flows Control activities Monitoring MIIS--IPOL 8530, "The Finance Function in Social Change Organizations"

9. Control environment 9 Sets the organizational tone, influences control consciousness of people and is the foundation of internal controls. Integrity and ethical values Commitment to competence Human resource policies & practices Board of directors and audit committee Management philosophy and operating style Organizational structure Assignment of authority & responsibility MIIS--IPOL 8530, "The Finance Function in Social Change Organizations"

10. Risk—susceptibility of material misstatement 10 Inherent risk Comes from within Could have to do with the nature of the business Control risk The risk that a company's internal controls are insufficient to mitigate or detect errors or fraud Based on assessed strength of internal controls system Detection risk The risk that the auditor will not detect a material misstatement that exists in the financial statements MIIS--IPOL 8530, "The Finance Function in Social Change Organizations"

11. 11 MIIS--IPOL 8530, "The Finance Function in Social Change Organizations"

13. How clear is the communication system regarding individual roles and responsibilities of operating the internal control system?MIIS--IPOL 8530, "The Finance Function in Social Change Organizations"

15. Preventive and Detective Controls

16. Preventive – attempt to deter or prevent undesirable events

17. Detective - attempt to detect undesirable events after the factMIIS--IPOL 8530, "The Finance Function in Social Change Organizations"

19. General systems, hardware, software

20. Procedural controls

21. Authorizations

22. Documentation

23. Independent checks

24. Segregation of duties

25. Physical controls

26. Activity performance reviews

27. Continual budget vs. actual

28. Relationship of non-financial to financial data

29. Training graduates vs. training expenseMIIS--IPOL 8530, "The Finance Function in Social Change Organizations"

31. Willingness to allow professional diagnosis for improvement

32. External audits

33. Scheduled (but not announced) internal testing of systems MIIS--IPOL 8530, "The Finance Function in Social Change Organizations"

34. Reminder—Written procedures 16 Test if written procedures exist and are followed covering the following areas: A/R A/P Procurement Inventory and asset control Accounting processes Cost evaluation Other relevant procedures MIIS--IPOL 8530, "The Finance Function in Social Change Organizations"

35. Basic Controls 17 Control over receipts Pre-numbered receipts 2 people for Cash collections and mail and make list of receipts Timely deposits—everything into the bank Monthly reconciliation to invoices or other billings Control over disbursements Always by check with support (use a standard internal doc) Prior authorization Tied to budget (i.e. planned) Contract in place? More than one sig? Have someone else reconcile the bank account MIIS--IPOL 8530, "The Finance Function in Social Change Organizations"

36. Written procedures—A/R A/R procedures Simple A/R cycle 18 Billing and how invoices are processed How payment is followed up (avoid overly “aged” AR) Opening the mail Receiving money Recording receipt of money Depositing money, and, Reconciling bank accounts. How and when we bill for services and get paid MIIS--IPOL 8530, "The Finance Function in Social Change Organizations"

37. Written procedures—A/P Simple A/P procurement cycle A/P procedures 19 Verifying proper authorization before checks are run Setting limits on when two signatures are needed Petty cash system for very small purchases No duplicate payments Payment against invoice Bill stamped paid Control of the check stock Receipt of goods in proper condition Easily accessible, relevant documentation How and when we enter into purchases and pay our bills MIIS--IPOL 8530, "The Finance Function in Social Change Organizations"

40. The process communicates an opinion as to the reliability of what you say (assert) you do and may help or hurt your credibility as an organization. Source: Me MIIS--IPOL 8530, "The Finance Function in Social Change Organizations"

43. Financial Statements

44. Internal Controls

45. Compliance with:

46. laws,

47. regulations,

48. Provisions of contracts or grant agreements that may have a direct and material effect on each of its major programs.

49. Follow upMIIS--IPOL 8530, "The Finance Function in Social Change Organizations"

51. Technical competence

52. Integrity

53. Independence

54. Objectivity

55. Detect intentional or unintentional material misstatements

56. Prevent the issuance of misleading financial statementsMIIS--IPOL 8530, "The Finance Function in Social Change Organizations"

57. Internal controls cases http://www.eurojournals.com/irjfe_27_11.pdf http://www.colorado.edu/ArtsSciences/facultystaff/administration/budget/docs/CaseStudies.pdf http://jobfunctions.bnet.com/abstract.aspx?docid=55890 Do a Google search—there is tons online 25 MIIS--IPOL 8530, "The Finance Function in Social Change Organizations"

59. If as a group, create a single group story mixing the best of all the stories

60. Make it dramatic

61. Exaggerate to make a point

62. Change names and dates to protect the innocent

63. Use the framework below to guide your discussion if needed

64. Post the story to the wiki (1 for the group)

65. If individual, post individuallyShare an internal control story from your own experience. It could be: Witness of risky behavior or actual loss Or accident waiting to happen Something caught in the nick of time, i.e. good procedures Too much control Not enough control Etc. MIIS--IPOL 8530, "The Finance Function in Social Change Organizations"