The North Carolina
Office of the State Controller
Internal Controls
Over
Cash Processes
June 7, 2010
David McCoy
State Controller
Introduction
Statewide Internal Control Program
Enhancing
Accountability in
Government through
Leadership and
Education
Introduction
Administrative Items
New audio conferencing service; phones have
been muted.
Course materials have been provided in advance.
Qualifies for up to 2 hours of CPE.
Polling questions
Use chat pod for questions.
For technical assistance Call Josh
at (919) 707-0765 or Jennifer at (919) 707-0764.
3
Introduction
Agenda
EstimatedTime
Topic
2:00 2:05
WelcomeandIntroduction BenMcLawhorn
2:052:20
OverviewofCashManagement Melody Tart
2:20 2:30
OverviewofInternalControlsandRisk JoshuaGeorghiou
2:30 2:50
OpportunityforFraud Joshua Georghiou
2:503:00
CashPoliciesandProcedures WynonaCash
3:00 3:05
CashSecurityPractices WynonaCash
3:05 3:20
Identifying theRisk AmandaWilliams
3:20 3:35
ImplementingInternalControlsover CashProcesses WynonaCash
3:35 3:50
KeyTakeAwaysandQuestionsandAnswers WynonaCash
Overview of
Cash Management
Overview of Cash Management
Cash Management Legislation
General Statute 147-86.10
All agencies, institutions, departments, bureaus,
boards, commissions and officers of the State. . .
shall devise techniques and procedures for the
receipt, deposit and disbursement of moneys
coming into their control and required by law to be
deposited with the State Treasurer.
http://www.osc.nc.gov/programs/cash_management/
statutes.html#1478610
6
Overview of Cash Management
Uniform Statewide Cash Management Plan
The State Controller, with the advice and assistance
of the State Treasurer, the State Budget Officer, and
the State Auditor, shall develop, implement and
amend as necessary a uniform statewide plan to
carry out the cash management policy for all State
agencies.
Overview of Cash Management
Cash Management over Receipts:
All funds received by a State employee in the
normal course of business are deposited with
the State Treasurer.
Funds are to be deposited daily according to
G.S. 147-77.
Funds due to the State are promptly billed,
collected and deposited.
8
Overview of Cash Management
Cash Management over Receipts (cont.):
Billings due to the state no more than 90 days shall
be turned over to the Attorney Generals Office for
collection.
Electronic payments should be accepted to the
greatest extent possible.
Overview of Cash Management
Cash Management over Receipts (cont.):
Policy for collecting of processing fee for returned
checks:
G.S. 25-3-506 allows for the charging and collecting of a
processing fee not to exceed $25 for checks that have
been refused by the financial institution due to
insufficient funds or the drawer did not have an account
at that institution.
10
Overview of Cash Management
Cash Management over Disbursements:
Moneys deposited with the State Treasurer
remain on deposit with the State Treasurer until
final disbursement to the ultimate payee.
Order in which appropriations and other
available resources are expended shall be
subject to G.S. 143c regardless of whether the
State agency disbursing or expending the
moneys is subject to the State Budget Act.
11
Overview of Cash Management
Cash Management over Disbursements (cont.):
Federal and other reimbursements of
expenditures paid from State funds shall be paid
immediately to the source of the State funds.
Billings to the State for goods received or
services rendered shall be paid neither early nor
late but on the discount date or the due date to
the extent practicable. Therefore the state does
not have a reason to be assessed late fees.
12
Overview of Cash Management
Cash Management over Disbursements (cont.):
Disbursement cycles for each agency shall be
established to the extent practicable so that the overall
efficiency of the warrant disbursement system is
maximized while maintaining prompt payment of bills
due.
Electronic Funds Transfer (EFT) should be used for
certain payments between State and local units,
vendors and employees when it is determined to be
mutually beneficial to both parties.
State administered procurement cards should be used
to provide employees with food, lodging and other
applicable subsistence in emergency situations.
13
Overview of Cash Management
Interest Maximized
For the General and Highway Fund, Interest earnings
shall not be allocated to an account by the State
Treasurer unless all of the moneys in the account are
expressly eligible by law for receiving interest
allocations otherwise the interest in earned by the
General or Highway Fund.
New Technologies
New technologies and procedures shall be considered
whenever the technologies and procedures are
economically beneficial to the State as a whole.
14
Overview of Cash Management
Penalty
A willful or continued failure of an employee paid
from State funds or employed by a State agency to
follow the statewide cash management plan is
sufficient cause for immediate dismissal of the
employee.
15
Overview of Cash Management
Agency Cash Management Plans:
Each agency, as defined in G.S.147-86.10, must
develop and maintain in its records a cash
management plan that is approved by signature
and date by the State Controller and the state
agency chief financial officer.
This plan must be consistent with and complete of
statutory requirements and the elements of the
uniform statewide cash management.
16
Overview of Cash Management
Agency Cash Management Plans (cont.):
Any significant change to the agency cash
management plan contemplated by the state agency
must be submitted to the Office of the State Controller
for review and approval prior to the change going into
effect.
Techniques and procedures devised by a state agency
for the receipt, deposit, and disbursement of moneys
coming into its control must be consistent with and
complete of the elements in its cash management plan.
17
Overview of Cash Management
Delegation of Disbursing Authority
The State Controller administers the State disbursing
system by authorizing state agencies, through execution
of a Delegation of Disbursing Authority, to make
expenditures through a disbursing account maintained
with the State Treasurer.
Delegation of Disbursing Authority agreements must be
kept current. A new Delegation of Disbursing Authority is
required when any of the parties to the agreement have
changed.
18
Overview of Cash Management
Delegation of Disbursing Authority (cont.):
Mail revised plans or delegations of disbursing
authorities to the following:
Office of the State Controller
Attn: Wendy Francis
1410 MSC
Raleigh, NC 27699-1410
19
Overview of
Internal Controls
and Risk
20
Overview of Internal Controls and Risk
A control is any action taken to mitigate or
manage risk and increase the probability
that the organizations process will achieve
its goals or objectives.
21
Overview of Internal Controls and Risk
Aspects of Internal Control
Internal control is a process.
Effected by a state entitys management and
other personnel.
Internal control is pervasive throughout a state
entity.
Internal control can be expected to provide only
reasonable assurance.
22
Overview of Internal Controls and Risk
What is the difference between a procedure
and a control?
A procedure is a series of steps taken to accomplish
an end; they detail the established/prescribed
methods to be followed. They describe how it
should be done.
A control is a series of checks and balances that
helps managers detect and prevent errors.
23
Overview of Internal Controls and Risk
Types of Internal Control Activities:
Adequate segregation of duties
Proper authorization of transactions and
activities
Adequate documentation and records
Physical control over records and assets
Independent checks on performance
24
Overview of Internal Controls and Risk
Risk is the probability that an event
or action will adversely affect the
organization.
25
Overview of Internal Controls and Risk
What could go wrong? Impacts of risk
26
Inaccurate Financial Reporting
Large Fines and Settlements
Loss of Assets
Noncompliance with Regulations
Public Scandals
Poor Business Decisions
State Auditor Findings
Overview of Internal Controls and Risk
Balancing Risk and Control
To achieve a balance between risk and
controls, internal controls should be:
27
Proactive
Value-added
Cost-effective
Address exposure to risk
Opportunity
for Fraud
28
29
Opportunity for Fraud
What Actions Constitute Fraud?
30
Opportunity for Fraud
Fraud Triangle
Fraud
Conducted by
Employees
Personal
Characteristics
Fraud
Conducted
by
Individuals
on Behalf of
the Agency
Situational
31
Opportunity for Fraud
Opportunity
Familiarity with operations
Turnover of key employees
Absence of explicit and uniform personnel
policies
Weak internal controls
32
Opportunity for Fraud
Rationalization
Behavioral
33
Personal Characteristics
I need it more than the
other person.
Lack of strong code of
personal ethics
Im borrowing and will
pay it back later.
A wheeler-dealer
personality
Everybody does it.
A strong desire to beat
the system
Im not paid enough.
A criminal or
questionable background
Opportunity for Fraud
Pressure
High personal debts or financial losses
Inadequate income for lifestyle
Excessive gambling
Emotional trauma in home life or work life
Peer group pressures
34
Opportunity for Fraud
Accountability and Control Red Flags
Lack of segregation of duties
Lack of physical security and/or key control
Weak links in chain of controls and accountability
Missing independent checks on performance
Relaxed management style
Poor system design
Inadequate training
35
Opportunity for Fraud
Cash Receipts Process Red Flags
Consistent shortages in cash on hand
Excessive number of voided transactions on a
regular basis without proper explanation
Not balancing cash to accounts receivable
subledger
No segregation of duties between the following:
36
Receiving cash
Posting to customer accounts
Issuing receipts
Deposit preparation
Opportunity for Fraud
Cash Disbursement Process Red Flags
High volume of manually prepared
disbursement checks
Paid invoices not properly canceled
Unrestricted access to blank checks,
signature plates, and check-signing
equipment
Frequent volume of voided or missing
checks
37
Opportunity for Fraud
How Can You Minimize Exposure to Fraud?
Develop internal controls to protect your
agency and the employee
Dont let an individual have complete control of
a financial process
Restrict access to computer facilities and data
Rotate job duties and cross-train
Review monthly statements
38
Opportunity for Fraud
Source: WTVD
39
Opportunity for Fraud
Source: WTVD
40
Opportunity for Fraud
Source: WRAL
41
Opportunity for Fraud
Durham sheriff audit: no supervision led to thefts
DURHAM(WTVD) AccordingtodocumentsobtainedbyABC11'sITeam,alackof
supervisionandfinancialexpertisearetoblameforyetanotherallegedtheftatthe
DurhamCountySheriff'sOffice.
Thedepartmentisdealingwithitssecondembezzlementwithintwoyears.Thisisnotthe
firsttimethedepartment'sfinanceshaveraisedconcerns.
KimPerkins,aformerDurhamCountySheriff'semployee,pleadedguiltyto
embezzlementin2007.Perkinswasaccusedofstealingmorethan$113,000.
Atleastoneauditshowslossesfromthecasemaybenearlythreetimesasmuchas
Perkinswasoriginallyprosecutedfor.Perkinspleadedguiltyandreceivedasuspended
sentence.Shewasplacedontwoyearsofsupervisedprobationandorderedtopayback
themoneyshe'dstolen.
IndocumentsprovidedtoEyewitnessNews,countyleadersrequestedareviewofboth
auditslastmonth.Itshowssomeoftherecommendationstoimprovecontrolsovercash
intheSheriff'sOfficein2007and2008wereeithernotimplementedcorrectlyornotat
all.
Source: WTVD
42
Opportunity for Fraud
Videos
43
Opportunity for Fraud
Video links:
Senior Center- Charity Embezzlement
http://www.youtube.com/watch?v=b7sn8FU3iL8&
feature=channel
Koss Corporation
http://www.youtube.com/watch?v=YbBH0wSrCCE
44
Opportunity for Fraud
FIGHT FRAUD, WASTE AND ABUSE!
Call the State Auditor's Hotline
at 1-800-730-TIPS
or go to the following link to report online
anonymously:
http://www.ncauditor.net/pub2/HotLine.aspx
45
How Important are
Cash Policies and
Procedures to Your
Agency?
46
Cash Policies and Procedures
Policies and Procedures are Critical Controls
Cash handling procedures are used to minimize
cash handling risks.
Multiple cash counts by different people
End of day closing procedure
Daily deposit procedures are used to minimize
cash risks and recognize the maximum earning
potential.
47
Cash Policies and Procedures
Policies and Procedures are a Critical Control (cont.)
Tone at the Top
Proper operating environment for employees
Due diligence and transparency
48
Cash Security
Practices
49
Cash Security Practices
Cash Security is About Prevention
Proper cash records
Clear and accurate recording of all cash
transactions
Ensure that all cash transactions are
documented and recorded immediately,
including voided transactions
Proper cash controls need proper cash records
for reconciliation
50
Cash Security Practices
Cash Security is About Prevention (cont.)
Segregation of duties
Physical control over cash
Document cash processes
51
Cash Security Practices
Cash Security is Critical for Internal Control
Proper cash records
Regular oversight (authorizations and
reconciliations)
Segregation of duties
Secure physical handling of cash
Documented cash management policies and
procedures
52
Identifying the Risk
What could go wrong?
53
Identifying the Risk
Cash Receipts Process
Objective: Account for all cash, check, credit card, and
wire transfer payments.
Procedures
Accept walk-in
payments.
Payments are lost.
Open mail-in
payments.
Payments are posted
for the wrong amount
or to the wrong account.
Issue receipts.
Batch and enter
receipts.
54
Risks
What could go wrong?
Payments are stolen.
Potential Impact
Misstatement of
account balance
Loss of assets
AUDIT FINDINGS
Identifying the Risk
55
Identifying the Risk
Cash Deposit Process
Objective: Deposit all cash and check payments.
Procedures
Potential Impact
Count all cash
and check
receipts.
The deposit amount
does not agree to the
cash receipts journal.
Misstatement of
account balance
Print the cash
receipts journal.
Cash is not deposited.
(lost or stolen)
Noncompliance with
Daily Deposit Act
Complete the
deposit slip.
The deposit is not timely.
Place the deposit
in a bank bag.
56
Risks
What could go wrong?
Loss of assets
AUDIT FINDINGS
Identifying the Risk
57
Identifying the Risk
58
Identifying the Risk
Cash Disbursements Process
Objective: Make payments to vendors and issue
refunds.
Procedures
Print and issue
checks.
Risks
What could go wrong?
Checks are issued for
the wrong amount.
Requisition funds. Unissued checks are
lost or stolen.
Transfer funds.
Payments are
batched and
entered.
Funds are insufficient.
Potential Impact
Misstatement of
account balance
Loss of assets
Non-sufficient funds
(NSF) fees
AUDIT FINDINGS
59
Identifying the Risk
60
Identifying the Risk
Bank Reconciliation Process
Objective: Identify errors and necessary adjustments.
Procedures
Risks
What could go wrong?
Reconciliations are not
Compare the bank
prepared or are not
statement to the cash
timely.
account balance.
Identify outstanding
items and research
unreconciled
amounts.
Prepare correcting
entries.
61
Outstanding or
unreconciled items are
not researched.
Potential Impact
Loss of Assets
Undetected
instances of
fraud
Noncompliance
AUDIT FINDINGS
Identifying the Risk
62
Internal Controls
Over
Cash Processes
63
Internal Controls over Cash Processes
Cash Receipts
Disbursements
64
Cash Processes
Deposits
Bank Reconciliations
Internal Controls over Cash Processes
Over-the-Counter Receipts
Cashier
The customer
receives an
automated receipt.
Head Cashier
Recounts and
verifies the totals.
Prepares the Daily Cash Summary
and Deposit slip.
End of Day Closing
Prepares a Cash Count
Sheet and prints the
POS totals.
Reconciles the Cash
Count Sheet to the POS
totals and signs off.
65
To controller
(for verification)
Internal Controls over Cash Processes
Manual Receipt Books
Issued by the Controllers
Office
Pre-numbered receipts
Triplicate copies
Includes a receipt in the daily
work for each transaction
Receipt books are reconciled
by someone other than the
issuer of the receipt.
66
Internal Controls over Cash Processes
Mail Receipts
Open the mail, prepare a list of
checks received and forward the
list, remittance advices to the
Accounting Office.
Endorse the checks and forward
them to the cashier who prepares
the daily bank deposit.
The Accounting Department enters
the information from the listing of
checks into the general ledger and
compares the listing to a validated
deposit slip prepared by the
cashier.
67
Internal Controls over Cash Processes
Deposits
Limited access to cash
Minimum cash on hand
Dont hold checks or cash. Setup a
suspense account.
Reconcile cash collections to
supporting documentation.
Adhere to the Daily Deposit Act.
Someone other than the deposit
preparer should verify the validated
deposit to the Cash Receipts Journal.
68
Internal Controls over Cash Processes
Bank Reconciliation
Preparer:
Reviewer:
+ + Deposits in Transit
- Outstanding Checks
+/- Bank Errors
CORRECT BALANCE
69
Date:
Date:
NSF (bounced)
Checks
- Service Charges
or Other
+/- Book Errors
CORRECT BALANCE
Internal Controls over Cash Processes
Cash Controls
Establishment of responsibility
Segregation of duties
Documentation of procedures
Safeguarding of assets
Independent internal verification
Other controls
70
Key
Take-Aways
71
Key Take-Aways
Cash Management Legislation
All agencies, institutions, departments, bureaus, boards,
commissions and officers of the Stateshall devise techniques
and procedures for the receipt, deposit and disbursement of
moneys coming into their control and required by law to be
deposited with the State Treasurer.
Uniform Statewide Plan
State Controller shall develop, implement and amend as necessary an
uniform statewide plan to carry out the cash management policy for all
State agencies, to include the following elements:
72
Cash management over receipts
Cash management over disbursements
Interest maximized
New Technologies
Penalties
Key Take-Aways
Agency Cash Management Plans:
Develop and maintain a cash management plan that is
approved by the State Controller and the state agency
Chief Financial Officer.
Comply with statutory requirements and the elements
of the uniform statewide cash management.
Significant changes must be submitted to the Office of
the State Controller for review and approval prior to the
change.
Techniques and procedures devised for the receipt,
deposit, and disbursement of moneys coming into its
control must be consistent with and complete of the
elements in its cash management plan.
73
Key Take-Aways
What is .?
Control
Risk
74
Key Take-Aways
Balancing Risk and Control
To achieve a balance between risk and
controls, internal controls should be:
75
Proactive
Value-added
Cost-effective
Address exposure to risk.
Key Take-Aways
Fraud Triangle
Fraud
Conducted by
Employees
Personal
Characteristics
Fraud
Conducted
by
Individuals
on Behalf of
the Agency
Situational
76
Key Take-Away
Cash Receipts Process Red Flags
Consistent shortages in cash on hand
Excessive number of voided transactions on a
regular basis without proper explanation
Not balancing cash to accounts receivable
subledger
No segregation of duties between the following:
77
Receiving cash
Posting to customer accounts
Issuing receipts
Deposit preparation
Key Take-Aways
Cash Disbursement Process Red Flags
High volume of manually prepared
disbursement checks
Paid invoices not properly canceled
Unrestricted access to blank checks,
signature plates, and check-signing
equipment
Frequent volume of voided or missing
checks
78
Key Take-Aways
How Can You Minimize Exposure to Fraud?
Develop internal controls to protect your
agency and the employee
Dont let an individual have complete control of
a financial process
Restrict access to computer facilities and data
Rotate job duties and cross-train
Review monthly statements
79
Key Take-Aways
What could go wrong? Impacts of risk
80
Inaccurate Financial Reporting
Large Fines and Settlements
Loss of Assets
Noncompliance with Regulations
Public Scandals
Poor Business Decisions
State Auditor Findings
Key Take-Aways
Cash Controls
Establishment of Responsibility
Segregation of Duties
Documentation of Procedures
Safeguard of Assets
Independent Internal Verification
Other Controls
81
Questions
And
Answers
82
INTERNAL CONTROLS OVER CASH
PROCESSES
For questions or additional information,
you may contact Risk Mitigation
Services at:
[email protected]83
