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Financial Management

Internal Controls

Introduction

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. 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.

Narrative

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:

  • procedures for reviewing the status of financial resources and other assets (e.g. perform cash reconciliation at the end of each day;  inventory equipment, fuel, supplies, and tools on a regular basis)
  • controlling access to funds and other assets (e.g. Keep undeposited funds in locked safe;  keep extra vehicle and building keys in locked drawer or cabinet; require employees to  sign for tools assigned to them)
  • a system of checks and balances to assure that no one person has total control over all phases of an activity or transaction. Often, this is accomplished by separating duties of staff members (e.g. assign task of reconciling bank statements to someone other than - or in addition to - the person who writes checks and deposits funds.)
  • appropriate authorization (e.g. require signature of employee’s supervisor on time sheet before processing payroll check; use purchase orders ; require manager’s approval for any  purchase over a specified amount)
Frequently Asked Questions

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. Moreover, 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 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, manager, administrator, department heads (if any), or 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 a municipality has 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. The municipality 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:

  • requiring receipts for all income received;
  • requiring regular deposits and reconciliation with income received;
  • requiring two check signers on all checks; and
  • requiring confirmation that funds have been authorized in the budget before making expenditures.

What are some of the risks of failing to have proper controls in place?

  • Revenues received may be recorded improperly, misplaced, lost, or stolen.
  • Public funds, equipment, inventory, personnel, property, and other assets may be used inefficiently, at significant additional cost.
  • Assets used for unauthorized purposes will not be available to accomplish goals and objectives established by the governing body.
  • Public assets may be diverted to personal use.
  • Information for decision making will be unreliable, untimely, or unavailable.
  • Public funds and resources may be stolen.

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:

  • spot checks of financial records and supporting documents to ensure compliance with policies and procedures;
  • monthly review of financial reports comparing actual income and expenses to the budget;
  • monthly review of accounts receivable and accounts payable reports;
  • confirmation that ledgers and bank accounts are reconciled monthly;
  • evaluating trends;
  • review of inventory records and schedules; and
  • investigating and following up on complaints, rumors, or allegations.

What are some signs of possible misuse of funds?

Signs indicating possible misuse of funds include:

  • expenditures for amounts or line items not included in the budget;
  • missing or altered checks, invoices, receipts, bank statements, or other documents;
  • excessive "cash" payments and "miscellaneous" expenditures;
  • transactions with inappropriate authorizations;
  • excessive complaints from customers or other employees;
  • unexplained declines from anticipated revenue or from inventories;
  • unexplained increases in expenditures;
  • excessive overtime hours;
  • staff refusal to provide financial reports to the governing body; and
  • payments to unauthorized vendors.

What should you do if misuse of resources is suspected?

If misuse of resources is suspected, report the suspicions to the 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.

Additional Resources
Applicable Laws and Regulations

Alaska Statutes

  • AS 29.20.390 (a) Itemized account of money received and spent, treasurer.
  • AS 29.20.500 (3) Prepare and submit annual budget.
  • AS 29.20.500 (4) Make monthly financial reports and other reports.
  • AS 29.20.500 (5) Exercise custody over real and personal property of the municipality.
  • AS 29.20.640 Reports required.
  • AS 29.35.100 Budget and capital program.
  • AS 29.35.120 Annual audit.
Revised 12/31/2014