Internal Controls Surrounding the Accounts Payable Control Cycle

Internal Controls Surrounding the Accounts Payable Control CycleMASBO 2009

Suzanne E. Smith, CPA1What are Internal Controls?Internal accounting controls are a series of procedures designed to promote and protect sound management practices, both general and financial in nature. The controls promote:Financial information that is reliable and timelyAssets and records of the school district that are safeguarded (not stolen, misused, or accidentally destroyed)The school districts policies being followedGovernment regulations being met2Why Should We Be Concerned with this Thing called Internal Control?Both the school board and district management are charged with safeguarding all inflowing monies in the form of tax dollars and other grants and awards and with safeguarding all assets and other resources purchased with these monies. (If you receive tax dollars, you are accountable.)Auditing Standards now call for a risk-based audit, which identifies major control cycles in a district and alerts the auditor to areas of risk that may require more attention during the annual audit. (There may no longer be the concept of auditing around controls.) (New for 2007-2008 audits)School Districts are now, more than ever, being held accountable for the absence of adequate control systems.3The Components of Internal Control of any DistrictThe Control Environment

Risk Assessment

Control Activities

Information and Communication

Monitoring

4Phase IThe Control EnvironmentThe ethics and integrity of the board, the administration, and the employees of the districtThe commitment to competence at all levelsThe administrations operating style and attitude towards controlsHuman resource policies (and practices)Organizational structure5The Control Environment and the Accounts Payable CycleHow does management and the board perceive the accounts payable cycle in your district?Are there high expectations for highly ethical behavior surrounding all aspects of ordering and paying for goods and services provided to the district?How would you board react to embezzlement concealed in the accounts payable cycle?Is honesty and integrity important to top-level administration in your district?

6Phase 2 - Risk AssessmentEach school district is different. A precondition to risk assessment is the establishment of clear, consistent financial goals.Examples of Financial Goals that Surrounding the Accounts Payable Cycle:No violations of state purchasing laws;No violations of School Board purchasing policies;Authorization for all purchases prior to the purchase being made no exceptions;Best practices in purchasing that will realize the most value for each dollar being spent;Prompt vendor payment within 45 days of the receipt of services/goods.7Phase 3 - Control ActivitiesThe Biggie in terms of commitmentInternal control activities are the policies, procedures, techniques, and mechanisms that help ensure that district managements directives to minimize risks are carried out.Control activities occur at all levels and functions of the district.They include approvals, authorizations, verifications, reconciliations, performance reviews, and the production of records and documentation.8Phase 4 - Information and CommunicationInternally generated information is critical to achieving the districts financial objectives.Financial reportsUnderstandableCorrectBudget reportsOutstanding purchase order reports

9Phase 5 - MonitoringAny control system must be continually monitored and updated in order to continue to work effectively. The district should emphasize to managers that they have responsibility for internal control and that they should monitor the effectiveness of control activities as part of their regular duties.10The Purchasing CycleOrder initiation/approvalPurchase Order issuanceArrival of goods/servicesInvoicing by vendorAccumulation of documents for the claims packetApproval of the claimPayment of the claimRecording of the transactionReconciliation of cash11Segregation of DutiesNo one individual should be responsible for all facets of the purchasing cycle.The more segregation of the duties in the purchasing cycle, the more difficult it is for someone to commit fraud or for errors to be made in the process.Segregation of duties is vitally important.

12Control Activities that will Minimize Risks Associated with Accounts Payable CycleSegregation of the duties of:Transaction AuthorizationPurchase Order Preparation/ApprovalClaims PreparationClaims Approval Two levelsAdministratorSchool BoardMailing/Preparation of Accounts Payable ChecksReconciliation of the Accounts Payable Clearing Bank Account13Control Activities that will Minimize Risks Associated with Accounts Payable CycleResponsibilities for expenditure approval function segregated from those responsibilities for the actual purchase order preparation and purchasing functions.Both supervisory review and approval and administrative approval should be given for a purchase transaction before the purchase order is prepared and signed by the purchasing agent.Supervisor Approves the purchase itselfAdministrator Approves the account number and affirms that the purchase is allowable per department or program guidelinesIt is okay for the purchasing agent to both prepare and sign a purchase order.It is not okay for the purchasing agent to be the only approval for the purchase.

14Control Activities that will Minimize Risks Associated with Accounts Payable CycleThe responsibilities for disbursement/expenditure preparation and approval functions should be segregated from those for recording cash disbursements into ledgers.Approval for purchase (Administrator)Care must be taken to ensure that the proper account number is being usedAccounts Payable Payment Packet Preparation (Accounts Payable Clerk)Approval of claims packet (Administrator)Approval of Claims Docket (School Board)Preparation of Accounts Payable Checks/Signature of Checks (Automated System)Independent review of cash disbursements listing Independent mailing of checks to vendorsRecording Cash Disbursements (Automated System) Independent reconciliation of claims docket total to cash disbursements total. Easier when combined with the movement of money to the accounts payable clearing bank account.Accounts Payable Clearing Fund Bank Account Reconciliation (Business Manager or Designee)15Procedural Controls for Accounts Payable/DisbursementsAll disbursements/expenditures should be required to be supported by invoices or other forms of documentation.All claims for payment should be approved by a responsible person before they are added to the claims docket.Invoice matched with requisition, receiving report, and purchase order copyInvoice checked for mathematical accuracy and applicable discountsEvidence of this review

Reimbursements for travel should require a form of pre-authorization at the appropriate district level.16How can you effectively cancel an invoice to prevent the payment of the invoice twice in error?You will more than likely be asked to answer this question by your auditor.Can you remember a case when you paid an invoice twice?Has this happened more than once?Effective cancellation can be a part of the overall software.Does someone balance vendor statements each month?Why is this important?17 Purchase OrdersPurchase orders are a vitally important document for the control and documentation of purchases.Are they pre-numbered?Remember: The computer may assign numbersAre they properly accounted for?Manual vs. ComputerAre they properly approved?Who should approve purchase orders?18Competitive PurchasingAre state purchasing laws followed?

Does the district have a centralized purchasing department?Why this is important?Why training is important

Are competitive quotes sought for amounts less than $5,000?

19Legal RequirementsDriven by Code Section 31-7-13

Requirements for a single purchase Defined as the amount encumbered by a single purchase order.

Purchase orders must not be split in order to circumvent state law. How do you prevent the splitting of purchase orders?20Which purchases does are encompassed by Section 31-7-13 ?Commodities and printingContracts for garbage collection or disposalContracts for solid waste collection or disposalContracts for sewage collection or disposalContracts for public constructionContracts for rentalsA purchase includes buying, renting, leasing, or otherwise acquiring21What are Commodities?Code Section 31-7-1 defines commodities to include various supplies, goods, merchandise, furniture, equipment, automotive equipment of every kind, and other personal property.22Small purchasesPurchases not over $5,000 (exclusive of freight and/or shipping charges) Competitive bids and/or advertising for formal bids not required.Should competitive bids be sought anyway?23Midrange PurchasesPurchases over $5,000 but not over $25,000 (exclusive of freight and/or shipping charges) Two competitive written quotes must be obtained.CompetitiveWritten

What controls are in place in your district to ensure that competitive written quotes are obtained when necessary?

24Large PurchasesPurchases over $25,000 (exclusive of freight and/or shipping charges) Advertisement for formal, competitive bids required.Advertise for 2 weeksClerk of the School Board must review the bid notice prior to the time the publication is madeWhat controls are in place in your district to ensure that formal competitive bids are secured when necessary?25Lease Purchase AuthorizationCode Section 31-7-13(e) gives authority for a lease-purchase of equipment. (Bid/quote rules apply)Lease-purchase financing may be obtained from the vendor or another source after obtaining at least 2 competitive bids.Rate is limited to amount permitted by Code Section 75-17-101Term is limited to the useful life of the equipment as set by IRS guidelinesMust contain an annual allocation dependency clause26Emergency Purchase ProcedureIf a School District experiences an emergency that calls for the purchase of commodities or repairs and if the delay that would be caused by the competitive bid process would be detrimental to the School District, then the provisions in state law for competitive bidding do not apply.The purchasing agent of the School District may approve the purchase or repair.At the next School Board meeting, the purchase must be identified and placed in the board minutes.27What Constitutes an Emergency?An emergency is an event that is outside the control of the School District, such as a flood, fire, explosion, storm, earthquake, epidemic, or riot.Lack of planning does not constitute an emergency.A knowledgeable purchasing agent should help define what constitutes an emergency.Documentation is part of this overall control.

28Exceptions from Bidding RequirementsOutside equipment repairs (with exceptions)In-house equipment repairs (with exceptions)Raw gravel or dirtGovernmental equipment auctionsPrior board approval requiredPerishable supplies or food for use in the school lunch programItems purchased on State Contract

29Federal PurchasesFor all Federal purchases Does a person responsible for program expenditures and knowledgeable of the types of expenditures allowed from each programApprove the purchase requisition before a purchase order is issued?Review the claims packets prior to final payment?30Paying ClaimsAre all disbursements made by check/warrant?Exception for petty cashAre only pre-printed, pre-numbered checks/warrants used?Exception for laser checksAre pre-printed checks controlled?Limited accessLogging of useagePhysical controls31Are voided checks/warrants properly mutilated and held for inspection?Are checks/warrants protected against alteration?Who has last custody?Are checks/warrants made payable to a specific payee?Is the advance signing of checks/warrants prohibited?What types of signatures are required?Machine generatedManual32The need for an imprest fundAn accounts payable imprest fund/bank account is used to pay all claims.The bank account is reconciled by a person independent of the accounts payable processing duties.The bank account is reconciled on a timely basis.33The Vendor Master FileThe vendor master file houses information on all vendors.Each quarter, management should run a report from the system showing changes to the vendor master file. New vendors should be added by a person independent of the accounts payable processing function.34An accounts payable clearing imprest fund/bank account is used to pay all claims.The bank account is reconciled by a person independent of the accounts payable/purchasing duties.The bank account is reconciled on a timely basis.The bank account is fully reconciled.The need for an imprest fund35Bond EmployeesBond employees.Why? No system of internal controls is 100% effective.State-mandated bonds.PrincipalsPurchasing Agents

36Monitoring OpportunitiesState Department AuditPrivate AuditInternal AuditErrors or other Mishaps37