Municipalities have a responsibility to manage their public funds and resources effectively and efficiently. Complying with state and federal requirements for budgeting and financial reporting helps identify whether or not public resources are used for the purposes intended, but does not always prevent inefficient or inappropriate use of those resources. It is not uncommon to see municipalities in which funds were used wastefully or even embezzled by staff. One way to promote efficient use of public resources and to prevent or reduce the risk of error and theft is to implement a system of internal controls.
Internal controls are methods – usually in the form of policies and procedures – for protecting cash, bank accounts, inventory, property and other assets. They typically include:
What are the benefits of internal controls?
Internal controls protect public assets by providing procedures for receiving, recording, and using public funds and other resources. They ensure that information is recorded in a consistent manner and reviewed regularly. They promote efficiency by defining specific roles and duties, assigning specific tasks, and preventing unapproved purchases and decisions from being made. And they help prevent errors and irregularities from occurring, and help detect errors and irregularities if they do occur.
How are internal controls established?
Internal controls are established by adopting policies which describe an organization’s goals (e.g. prevent unauthorized spending), and procedures, or specific steps, for achieving that goal (e.g. require purchase order approved by department head).
In small rural Alaskan communities, the task of drafting internal controls is often left up to the mayor or manager, the administrator, the department heads (if any), or to the city clerk. Once drafted, internal control policies and procedures should be submitted to the governing body for approval. After approval, copies of specific policies and procedures should be provided to appropriate staff. It will then be up to the appropriate supervisors and to the administrator, manager, or mayor, and ultimately to the governing body, to assure that internal controls are implemented.
Often internal control is established by separating duties among staff members to prevent one person from having complete access and control over funds and assets. For example, requiring that one person approve financial transactions and another person write the checks helps prevent the check writer from making unauthorized expenditures. Having a third person review ledgers and bank statements further reduces the opportunity for unauthorized purchases: if errors or irregularities do occur, reviewing records on a regular basis will help detect them in a timely manner.
We have only one staff person in the office and cannot afford to hire another. How can we implement a system of checks and balances?
Whether you have many employees or only one, no person should have complete access to all funds and resources, unlimited authority, or be free from supervision and regular review. You will have to implement procedures for recording all income received and deposited, for approving expenditures, for reviewing records on a regular basis, and for limiting authority. Some examples of such procedures include:
What are some of the risks of failing to have proper controls in place?
How can you ensure that your internal control system is working?
Regular monitoring helps ensures that procedures are being followed and that problems are detected in a timely manner. Regular monitoring includes:
What are some signs of possible misuse of funds?
Signs indicating possible misuse of funds include:
What should you do if misuse of resources is suspected?
If misuse of resources is suspected, report the suspicions to the manager or appropriate supervisor, who should then review financial and operational data and use other appropriate techniques to test if the concerns are valid. If a problem is discovered to be the result of an error or violation of policy, then steps should be taken to correct the error or violation and prevent it from reoccurring. If fraud or embezzlement is discovered following a thorough investigation of the matter, then termination of the employee or other action, in accordance with your personnel policies, is often the next step, along with appropriate action to recover stolen resources.